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Country Finance

Turkey

Released January 2008 The Economist Intelligence Unit 111 West 57th Street New York NY10019 USA

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Turkey 1

Country Finance 2008 www.eiu.com © The Economist Intelligence Unit Limited 2008

Contents 3 Market assessment

3 Market watch

4 Turkey at a glance

5 Banks Overview Bank regulators Domestic banks Foreign banks Investment banks and brokerages Development and postal banks Offshore banks

17 Other financial institutions Overview Insurance companies Pension funds Mutual funds Asset-management firms Venture-capital and private-equity firms Factoring firms Financial leasing companies Other institutions

26 Monetary system Overview Base lending rates Monetary policy Fiscal policy

31 Currency Overview Currency behaviour Currency outlook

33 Foreign-exchange regulations Overview Incoming direct investment Portfolio investment Restrictions on trade-related payments Loan inflows and repayment Non-residents borrowing locally Repatriation of capital Remittance of dividends and profits Remittance of royalties and fees Hold accounts Netting

37 Taxation and investment incentives Overview Corporate tax rates Taxable income defined Tax traps Incentives

42 Cash management Overview Payment clearing systems Receivables management

Payables management Cash pooling

44 Securities markets Overview Trading, clearing and settlement Listing procedures Underwritten offerings Rights offerings Private placements GDRs/ADRs Alternative markets

50 Currency and derivatives markets Overview Currency spot market Futures and forward contracts Options Swaps Exotics Regulatory considerations

52 Short-term investment instruments Overview Time deposits Certificates of deposit Treasury bills Repurchase agreements Commercial paper Banker�s acceptances

55 Short-term financing Overview Overdrafts Bank loans Discounting of trade bills Commercial paper Banker�s acceptances Factoring Supplier credit Intercompany borrowing

58 Medium- and long-term financing Overview Bank loans Financial leasing Corporate bond issues Private placement of notes Structured finance Infrastructure financing

63 Trade financing and insurance Overview Export insurance programmes Official export-credit programmes Private export-financing techniques Import credit Countertrade Forfaiting

2 Turkey


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Rosemary Didomizio

Amy Ha

Ali Kabir

Tom Ehrbar Managing editor, Country Commerce

Rachel Makabi

Conrad von Igel

Debarati Ghosh Managing editor, Country Finance

Turkey 3


Market assessment • The Justice and Development Party (AKP) returned to power in July 2007 elections. The AKP won 341 seats in parliament, and the Economist Intelligence Unit expects it to maintain power throughout the parliamentary term. 4

• Although the pace of acquisition slowed, foreign banks continued to take majority or substantial minority stakes in Turkish banks in 2007. Industry sources estimated that foreign capital accounted for around 50% of the sector�s total equity at end-November 2007. Foreign banks recorded total profits of US$1bn in 2006, up from US$382m the previous year. 7

• In May 2007 the government sold a 25% stake in the state-owned Halkbank by public offering on the Istanbul Stock Exchange for US$1.8bn, the largest single offering in the exchange�s history. In November 2007 the government announced plans to sell the remaining 75% of Halkbank by block sale in 2008. However, as of early January 2008, it was unclear when or whether the sale would go ahead. 11

• Islamic banking has continued its rapid growth. At end-June 2007, Turkish participation banks (PBs), which operate according to Islamic principles, had total assets of US$16.8bn, up from US$13.7bn at end-2006 and US$7.4bn at year-end 2005. However, by end-June 2007 they still accounted for just 3.1% of the total assets of the Turkish banking sector. 12

• After more than a decade without any sector-specific legislation, a new Insurance Law was promulgated in June 2007. The new law made it illegal for the same company to operate in both the life and non-life branches. 20

• Foreign direct investment (FDI) in Turkey reached a record level of US$20bn in 2006. A further US$15.3bn entered the country in the first nine months of 2007. 35

• There were nine initial public offerings (IPOs) on the Istanbul Stock Exchange (ISE) in 2007, compared with 15 in 2006. However, at US$3.3bn, the total value of IPOs during 2007 was the highest in the ISE�s history. 48

Market watch • The government announced plans in November 2007 to sell a further 25% of Vakifbank in a second offering on the Istanbul Stock Exchange in 2008. However, it was still unclear as of mid-January 2008 whether the Turkish government would relinquish overall control of Vakifbank and, given doubts about the bank�s ability to compete as a privately owned bank, whether foreign or local investors would take a controlling stake in it 11

• The government is expected to hold an IPO for a 49% stake in the state-owned Ziraat Bankasi, the largest bank in the country, at some point in 2008, but it did not specify when. 12

• The insurance sector has had a hard time since recovering from the economic recession of 2001, as low profit margins and intense competition has forced several closures. The sector is expected to undergo further consolidation in 2008 as the larger domestically owned insurers seek acquisitions in order to be able to compete with firms that already have a foreign shareholding. 19

• The Economist Intelligence Unit expects the economy to show solid growth in 2008 which, combined with substantial primary surpluses and further privatisation, should ensure that the government-debt/GDP ratio continues to decline. Crucial to the medium- to long-term fiscal outlook will be the future of social-security reforms, implementation of which was delayed after a constitutional court ruling in 2006; we expect the government to implement these in 2008. 29

• It is possible that the Turkish government may seek a new agreement with the IMF when its current three-year US$10bn deal expires in May 2008. Although government officials do not believe Turkey needs the funds, they also think international investors would be reassured by the fact that the IMF was monitoring Turkish economic and fiscal policy. 29

• At end-2007 the government unexpectedly increased the rate of VAT on leasing transactions to 18%, claiming the sector had been abusing the reduced rates and tried to pass off payments in instalment plans as leasing transactions. The sudden increase in VAT came as a shock to the industry, partly because the government did not mention the impending increase in a mid-December 2007 meeting it had with the sector, shortly before it raised the VAT rates. 61

4 Turkey


Turkey at a glance

Elections: The Justice and Development Party (AKP) returned to power with a landslide victory in the general election held on July 22nd 2007. The AKP, which had first taken power in November 2002, won 46.6% of the popular vote and 341 seats in the 550-seat parliament. The next election is due by July 2011, and the Economist Intelligence Unit expects the AKP to maintain power throughout that period.

Government: Turkey is a secular democratic state under the 1982 constitution. It has a parliamentary system of government, headed by a prime minister. A multiparty system has existed since the 1940s but has been intermittently interrupted by military rule. Constitutional reform in 1995 retained restrictions on the formation of ethnic, religious or communist parties. The 550-seat national assembly (Meclis) is elected every four years. Under changes introduced in October 2007, the largely ceremonial president is elected by popular vote once every five years. The next presidential election is due in August 2012.

Major political parties: Democratic Society Party (DTP, formerly Dehap/Hadep), Felicity Party (Saadet, SP), Justice and Development Party (AKP), Motherland Party (Anap), Nationalist Action Party (MHP), Republican People�s Party (CHP), Democrat Party (DP).

Fiscal year: January 1st�December 31st.

Moody�s Investors Service: Ba3

Standard & Poor�s: BB-

Fitch: BB-

*Senior unsecured long-term foreign-currency debt ratings.

Economist Intelligence Unit country risk rating Sovereign risk Currency risk Banking sector risk Political risk Economic structure risk

B B BB BB BB * Overall scores for each risk category are on a numerical scale of 0�100 (0 least risky, 100 most risky). There are ten rating bands based on this numeric scale�AAA, AA, A, BBB, BB, B, CCC, CC, C and D�each comprising ten units of the 0�100 scale. For example, scores 0�10 = AAA and > 10�20 = AA. If the score is in a boundary area between two rating bands (scores ending in 0, 1, 2 and 9), it is at the analyst�s discretion whether to assign the higher or lower rating. The overall score for each category of risk is a weighted combination of the scores assigned to thequalitative and quantitative indicators that inform our credit risk model.

Economic assessment 2006a 2007 b 2008c

GDP (US$ bn at current market prices) 403.5 492.5 544.7GDP growth (% real change) 6.1 3.9 3.8Private consumption growth (% real change) 5.2 2.3 3.8Government consumption growth (% real change) 9.6 6.5 3.5Gross fixed investment (% real change) 14.0 6.2 6.7Consumer prices (% av) 10.5 8.8 8.1Exports of goods and services (% real change) 8.5 10.2 8.4Imports of goods and services (% real change) 7.1 10.0 9.4Exports fob (US$ bn) 91.9 112.1 130.7Imports fob (US$ bn) 133.2 -159.1 -181.8Current-account balance (US$ bn) -32.8 -36.1 -38.8Current-account balance (% of GDP) -8.1 -7.3 -7.1Exchange rate YTL:US$1 (av) 1.43 1.31 1.31

(a) Actual. (b) Economist Intelligence Unit estimate. (c) Economist Intelligence Unit forecasts. Source: Economist Intelligence Unit, Country Forecast Turkey, January 2008.

Political structure

Sovereign debt ratings*

Turkey 5


Executive summary

Turkey�s financial system has traditionally been susceptible to sudden and dramatic crises of confidence. A bout of panic in late 2000 and early 2001 sparked a sell-off in the currency, drove up interest rates and undercut share prices. The authorities allowed the Turkish lira to float freely, and the economy subsequently entered a sharp recession, from which it emerged in 2003. In November 2002 the newly created Justice and Development Party (AKP) swept national elections and formed the first single-party government in many years. In 2003�06, it oversaw a period of unprecedented economic stability and growth, enabling it to secure a second mandate with a landslide victory in elections in July 2007. A handful of large domestic banks, both state-owned and private, dominate the financial sector. They are often leaders or members of conglomerates that have widely dispersed holdings throughout the economy. A spate of acquisitions in 2005 and 2006 means that foreign banks now account for around 50% of the sector�s total equity, through majority-owned locally incorporated affiliates, stakes in majority Turkish-owned banks and purchases made on the Istanbul Stock Exchange. Brokerages and leasing and factoring firms are also important parts of the financial system. Insurance and collective investment instruments have yet to flourish. Turkey presents a difficult operating environment for foreign companies. Inflation has remained stubbornly high, though the country is finally having some success in bringing it down. Macroeconomic variables, such as interest rates and the value of the local currency, are extremely volatile. The country has few remaining restrictions on the movement of capital, but there are serious bureaucratic impediments to investment. Despite recent amendments, taxation is relatively heavy for a developing country, and changes in the rules come frequently. The Istanbul Stock Exchange has grown in recent years but remains a small market susceptible to wild swings in sentiment. Any gains investors made in the late 1990s were swept away during the global equity retreat in 2000 and the local financial implosion of 2001. However, share prices have rebounded strongly in recent years, even though only a handful of companies chose equity offerings as their method of financing. Political and economic policy risk continue to be of far greater importance than fundamentals about companies. Raising corporate funds is difficult in Turkey, with credit available only in the short term and at high real rates of interest. Other types of available financing include factoring and leasing. Most foreign firms use funds supplied by their parent companies and generated from their own cashflows.

Banks

A handful of major players dominate the banking sector. According to the Banks Association of Turkey, as of end-September 2007 (most recently compiled data), the five largest banks represented about 62% of the sector�s total assets, 64% of total deposits and 57% of total loans, compared with 60%, 64% and 56%, respectively, at end-September 2006. For the ten largest banks, the figures were 85%, 89% and 83% at end-September 2007, compared with 84%, 89% and 80%, respectively, at end-September 2006.

The progressive internationalisation of the economy in the late 1980s and early 1990s led to the growing presence of foreign banks, but until 2004, these banks only accounted for a relatively small proportion of the sector as a whole. This changed with a series of acquisitions, which resulted in a rapid increase in the market share of foreign-owned banks from late 2004 onwards. At end-September 2007 majority foreign-owned banks accounted for 12.6% of the sector�s total assets and 11.6% of its total deposits, up from 10% and 7%, respectively, at end-September 2006, and 6% and 5%, respectively, at end-September 2005. At end-September 2007, the last period for which reliable figures for individual banks are available, Finans Bank of Greece had a market share of 3.6%. Denizbank (France), the second-largest foreign bank in Turkey,

Overview

6 Turkey


accounted for 2.4%, ahead of HSBC (UK) with 2.2%, Fortis (Belgium) with 1.7% and Citibank (US) with 0.9%.

In addition, 13 majority locally owned banks have minority foreign shareholdings, including industry leaders such as Akbank, Garanti Bankasi and Koc Financial Services (the owner of Yapi Kredi Bank). The Banking Regulation and Supervisory Agency (BRSA) estimated that when both minority foreign shareholdings and foreign ownership of shares in banks traded on the Istanbul Stock Exchange (ISE) were taken into account, the share of foreign capital in the banking sector�s total equity stood at a little over 50% at end-November 2007.

During the late 1990s, there was a rapid increase in the number of domestic banks and in the sector�s reliance on the high real returns on Treasury bonds and bills; this reliance undermined the sector when the price of Treasury bonds subsequently fell in 2000 and 2001. The health of the sector was further hurt by successive governments� use of the state banks for political purposes, such as financing populist policies. The government also failed to clamp down on malpractice and excessive credit exposure among a number of small and medium-sized banks owned by individuals with close connections to influential politicians.

The weakness of the banking sector played a major role in the currency collapse of February 2001 and a subsequent deep recession. The 2001 financial crisis had its origins in the late 1990s, when many domestic banks borrowed heavily from abroad to finance lucrative purchases of government paper. Inflation had not fallen as quickly as anticipated, leading to a real appreciation in the value of the Turkish lira. The currency began to stabilise in late 2001 and 2002.

On paper, subsequent restructuring during 2001 and 2002 seems to have strengthened the banking sector. Of the sector�s total loan portfolio of US$213.2bn at end-September 2007, 3.6% was non-performing, compared with 3.8% at end-September 2006, 5.4% at end-September 2005, 6.2% at end-September 2004 and 15.6% at end-2003. However, the short term of most corporate loans in Turkey makes it very difficult to assess the true extent of the problem, as the loans are often restructured and rolled over before they have time to register as non-performing.

Although there is no doubt the sector is better regulated than it was in the 1990s, it is still unclear exactly how well regulated it is. Personal connections still provide scope for a degree of regulatory flexibility. Within months of the financial collapse of 2001, the Turkish authorities declared that the crisis had both eliminated the weaker members of the sector and enabled them to tighten the regulatory environment. However, the collapse of Imar Bankasi in July 2003, and the subsequent revelations of widespread malpractice at the bank, suggested that regulation was not as tight as the authorities claimed.

Throughout the 1990s many of the smaller domestic banks relied primarily on the high real returns on Treasury bills, which they traditionally financed through borrowing on the international market. Starting in 1995 several tried to reduce their dependence on foreign loans by expanding their branch networks in an effort to broaden their deposit bases and increase their fee- and

Turkey 7


commission-earning potential. By the end of the 1990s, the ideal size for a small bank was seen as 60�70 branches, compared with 3�4 branches at the beginning of the decade. The financial crisis that broke in February 2001 forced many small and medium-sized banks into liquidation and accelerated the trend towards consolidation in the sector. The dramatic decline in returns on government paper that accompanied economic recovery in 2002�04 increased the pressure on banks to expand their branch networks in order to capitalise on the new growth area of retail banking, particularly credit cards and consumer loans. By November 2007 it had become very difficult for medium-sized banks to survive with fewer than 100 branches, and those that had not already done so were either planning to expand to 200�250 branches or looking for foreign partners.

By September 2007 the total number of bank branches stood at 7,366, up from 6,575 in September 2006 but still down from the levels before the crisis of 2001, when the total stood at 7,838 at end-2000. Similarly, the number of personnel employed in the banking sector rose to 153,783 in September 2007, up from 140,888 in September 2006, but down from the pre-crisis level of 170,401 at end-2000.

In December 2007 there were 33 commercial banks: three owned by the state, 12 by the domestic private sector, one by the Savings Deposit Insurance Fund (SDIF) and 17 with a majority foreign shareholding. There were 13 development and investment banks: three owned by the state, eight by the private sector and two with majority foreign shareholding. The number of banks operating in Turkey declined from 81 at end-1999 to 47 at end-2006, following bank closures since 2000 and the merger of several others. It stood at 46 in November 2007.

Since year-end 2002, banks have had to prepare their quarterly and year-end balance sheets and submit them to the Banking Regulation and Supervisory Agency (BRSA) according to the inflation-accounting method. At end-September 2007 the Turkish banking sector had total assets of US$436.1bn (equivalent to about 84% of annual GNP, but still down from 90% at end-2000, shortly before the crisis of 2001), and up 41.6% from US$307.9bn at end-September 2006, according to the Banks Association of Turkey. Commercial banks accounted for about 96.6% of the sector�s total assets. Total deposits stood at US$277.3bn in September 2007, of which US$178.0bn (64.2%) were in Turkish lira and US$99.3bn (35.8%) were in foreign currency.

The banking sector recorded total net profits of US$7.8bn in 2006, up from US$4.3bn in 2005 and US$4.8bn in 2004. Privately owned commercial banks recorded net profits of US$3.3bn in 2006 (latest available data), compared with US$1bn in 2005. The net profits of the state-owned domestic commercial banks stood at US$2.7bn, up from US$2.1bn in 2005. Foreign banks recorded total profits of US$1.0bn in 2006, up from US$382m the previous year; development and investment banks had total profits of US$526m, compared with US$509m in 2005. Birlesik Fon Bankasi, which is administered by the SDIF, posted profits of US$279m in 2006, up from US$193m in 2005.

In the first nine months of 2007, the industry posted total profits of US$9.47bn. Privately owned commercial banks recorded net profits of US$4.99bn,

8 Turkey


compared with net profits of US$2.88bn for state-owned domestic commercial banks (including the banks administered by the SDIF); profits were US$1.02bn for foreign banks and US$507 for development and investment banks.

Istanbul is the only financial centre.

Financial market indicators Demand for financial services

Population (estimated), mid-2006a (m) 75.21 Under 15 (m) 18.75 Between ages 15 and 64 (m) 51.25 Age 65 and above (m) 5.22Gross domestic product (estimated), 2007a (US$ bn) 497.08Gross domestic savings (estimated), 2007a (US$ bn) 118.30Gross domestic product per person (estimated), 2007a (US$) 6,610Personal disposable income per person (estimated), 2007a (US$) 3,070Private consumption per person (estimated), 2007a (US$) 4,370Financial intermediaries

Total lending by financial sector, 2007a (% of GDP) 0.06Total lending to the private sector, 2007a (% of GDP) 0.03Insurance companies total premiums, 2006b (% of GDP) 1.64 of which life insurers, 2006b (% of GDP) 0.24Private pension-fund assets, end-September 2007c (% of GDP) 0.64Mutual-fund assets, end-September 2007d (% of GDP) 3.87Factoring transactions, 2006e (% of GDP) 4.88Leasing volume, year to end-September 2007f (% of GDP) 1.38Capital markets

Domestic equity market capitalisation (main market), end-November 2007g (% of GDP) 56.67Capital raised by initial public offerings, 2007g (% of GDP) 0.67Domestic financial sector and corporate debt issues outstanding, June 2007h (% of GDP) 0.02International financial sector and corporate debt issues outstanding, September 2007h (% of GDP) 2.23

Sources: (a) Economist Intelligence Unit, Market Indicators and Forecasts. (b) Swiss Re, Sigma 4/2007. (c) Turkey Capital Markets Board. (d) Turkey Capital Markets Board. (e) Factoring

Association (Faktoring Dernegi). (f) Turkey Financial Leasing Association. (g) Istanbul Stock Exchange. (h) Bank for International Settlements, Quarterly Review on International Banking and

Financial Market Development.

A new banking law was passed in October 2005 (Banking Law 5411, of October 19th 2005, published in the Official Gazette 25983, of November 1st 2005) superseding Banking Law 4389, of June 18th 1999 (published in the Official Gazette 23734, of June 23rd 1999). The new law responded to IMF pressure on Turkey to improve its supervisory and regulatory environment. It increased the regulatory powers of the Banking Regulation and Supervisory Agency (BRSA�Bankacilik Duzenleme ve Denetleme Kurumu), including granting it the right to conduct on-site inspections, determine corporate-governance structures, determine processes and principles, and amend the Turkish regulatory framework to align it with that of the EU. Law 5411 requires that banks be registered as joint-stock companies and have minimum paid-in capital of YTL30m. Article 7 of Banking Law 5411 details the minimum requirements for both a new bank and its founders.

Article 54 of Law 5411 states that the total amount of financing a bank may provide to a group of real or legal persons, who are in direct or indirect credit relationships, may not exceed 25% of the bank�s own funds. It also retained the

Bank regulators

Turkey 9


concept introduced under Law 4389 of �major credits� (defined in Article 54 of Law 5411 as financing in excess of 10% of the bank�s own funds). The total of such major credits cannot be eight times the bank�s total funds (equity capital/resources).

Banks must maintain minimum net-worth-to-risk-asset ratios of 8%, in line with the standards set by the Basel-based Bank for International Settlements. Banks� net general foreign-currency positions are restricted to a maximum 20% of their capital base (Central Bank Communiqué, published in the Official Gazette of August 5th 1999).

Investment banks are forbidden from accepting deposits. Apart from this restriction, all banks registered in Turkey are theoretically able to undertake almost any type of financial business�from underwriting securities to straight lending and deposit taking. Under Article 79 of Law 5411, all banks must become members of the Banks Association of Turkey (Bankalar Birligi) within one month of receiving their operating permits.

The BRSA, answerable directly to the prime minister and the Council of Ministers, oversees the implementation and supervision of banking regulations. The institution began operations at the beginning of September 2000. In addition to overseeing the sector, it also may issue, in the form of communiqués, amendments and clarifications to existing banking laws and regulations.

The BRSA is also responsible for approving applications to establish new banks and submitting successful applications to the Council of Ministers for ratification. Banks resident in Turkey seek permission from the BRSA for mergers and liquidations and before establishing partnerships with individuals or corporations based outside the country. Under Law No. 5411, the BRSA is now responsible for the principles and procedures related to liquidity requirements.

The BRSA is led by an executive body of seven members, each of whom holds office for six years. They are appointed by the Council of Ministers and include two members selected from four candidates nominated by the Treasury Under-secretariat and one member selected from two candidates (each) nominated by the Ministry of Finance, the Central Bank, the Banks Association of Turkey, the Under-secretariat for State Planning and the Capital Markets Board. The current chairman of the BRSA is Tevfik Bilgin, a US-educated former Treasury official who had most recently served as general manager of the state-owned Halkbank. When the chairmanship of the BRSA came up for renewal at end-March 2006, Mr Bilgin was confirmed in his post for another six-year term.

The watchdog Capital Markets Board (Sermaye Piyasasi Kurulu�SPK) also plays a major regulatory role in the sector and is the main institution charged with supervising the primary and secondary capital markets by enforcing reporting requirements. The Central Bank is responsible for monitoring banks� compliance with reserve requirements, carrying out open-market operations in pursuit of official monetary policy, and supervising the interbank markets in Turkish lira and foreign exchange.

10 Turkey


The Savings Deposit Insurance Fund (SDIF), financed by a levy on banks and managed by the BRSA, functions primarily to fund a guarantee on bank deposits. But it is also used to seize control of troubled banks and to finance their rehabilitation or liquidation. The SDIF assumed control of eight domestic banks in 2001 and Pamukbank in 2002, bringing the total taken over to 21. In July 2003 the BRSA also seized control of Imar Bankasi and immediately cancelled its banking licence, in effect liquidating the bank. No banks were taken over between July 2003 and end-November 2006. As of November 2007 only one, Birlesik Fon Bankasi (the former Bayindirbank, which was renamed in January 2006), still remained under SDIF control. The others had been liquidated, merged or sold off. Birlesik Fon Bankasi has been restructured as an asset-management company to manage the assets held by the SDIF.

From 1994 to mid-2004, the SDIF, administered by the Central Bank, guaranteed 100% of bank deposits. The fund is financed by contributions from banks (full details of which are contained in Article 130 of Law 5411). However, major domestic banks lobbied for a removal of the 100% guarantee, which they claimed smaller banks use to offer unsustainable rates of interest on deposits. Depositors were able to place their money in a small bank offering high rates of interest without worrying about whether the bank would collapse. In May 2004 the BRSA announced that, henceforth, the guarantee would be limited to a maximum of TL50bn (changed to YTL50,000 from January 1st 2005) per account.

Top ten domestic banks Ranked by assets at end-September 2007�US$ bn

Bank Assets Market share (%)Ziraat Bankasi* 64.0 14.7Is Bankasi 63.5 14.6Akbank 53.4 12.2Garanti Bankasi 49.4 11.3Yapi Kredi Bankasi 39.8 9.1Vakifbank* 33.3 7.6Halkbank* 31.5 7.2Oyakbank 10.1 2.3Turk Ekonomi Bankasi 9.0 2.1Sekerbank 4.6 1.1Total market 436.1 100.0

* State-owned

Source: Banks Association of Turkey.

Commercial banks dominate the sector, accounting for 95.7% of bank credits outstanding as of end-September 2007, according to the Banks Association of Turkey. Private-sector banks have steadily eroded the dominance of state-owned banks, but as of September 2007, the leading state-owned banks still accounted for 29.5% of the sector�s total assets, 22.1% of total loans and 36.6% of total deposits, compared with 30%, 21% and 37%, respectively, in September 2006.

Traditionally, the state-owned Ziraat Bankasi, which was established in 1863, has been the largest bank in Turkey. At end-September 2007 Ziraat still ranked first in terms of asset size, with US$64.0bn, just ahead of the privately owned Is

Domestic banks

Turkey 11


Bankasi, which had total assets of US$63.5bn. Ziraat also ranked first in terms of the number of branches and personnel, at 1,248 and 20,011, respectively, compared with Is Bankasi�s 929 and 19,159, respectively. Is Bankasi was followed by Akbank, with assets of US$53.4bn and 698 branches. Garanti Bankasi was next, with assets of US$49.4bn and 545 branches, and Yapi Kredi Bankasi ranked fifth, with total assets of US$39.8bn and 660 branches.

Ziraat Bankasi also ranked first in terms of deposits, with US$54.5bn (19.6% of the sector total) at end-September 2007, ahead of Is Bankasi, with US$36.1bn (13.0%); Akbank, with US$32.4bn (11.7%); and Garanti Bankasi, with US$28.7bn (10.4%). However, Ziraat ranked only sixth in terms of loans in the first nine months of 2007, at US$16.5bn (7.7% of the sector total), behind Garanti Bankasi (US$28.8bn or 13.5%), Akbank (US$27.6bn or 13.0%), Is Bankasi (US$26.7bn or 12.5%), Yapi Kredi (US$20.9bn or 9.4%) and Vakifbank (US$17.3bn or 8.1%).

Reorganising the state banks, via privatisation if possible, has long been seen as necessary, but successive governments have avoided it for fear of losing the political leverage provided by control over such a large portion of the financial sector. Additionally, the banks had large portfolios of non-performing loans. However, the improved economic climate from 2003 onwards enabled the three state banks to record a marked improvement in non-performing or doubtful loans. At end-September 2007, 4.5% of their loan portfolios were non-performing, compared with 3.6% at privately owned banks, according to the Banks Association of Turkey. Furthermore, this was an improvement on end-September 2006, when 5.8% of their loan portfolios were non-performing, and end-September 2005, when the figure was 9.1%. In 2002, just after the 2001 crisis year, a full 48.6% of the loan portfolios of state-owned banks were non-performing.

When it took power in November 2002, the new government of the Justice and Development Party (AKP) reiterated the previous administration�s commitment to privatisation in the financial sector. Although nothing was done during the first three years the AKP was in power, on November 14th 2005, a 25.2% stake in Vakifbank was sold by initial public offering on the Istanbul Stock Exchange for US$1.27bn. Around 70% of the stock was sold to institutional investors, with Turkish retail investors accounting for the remaining 30%. In November 2007, the government announced plans to sell a further 25% of Vakifbank in a second offering on the Istanbul Stock Exchange in 2008. However, as of January 2008, it remained unclear whether the Turkish government would relinquish overall control of Vakifbank and, given doubts about the bank�s ability to compete as a privately owned bank, whether foreign or local investors would take a controlling stake in it. However, Vakifbank was receiving foreign help, and in December 2007, it announced it had secured a US$375m syndicated loan from a consortium of 23 foreign lenders.

In late 2006 the government began preparations for the privatisation of another state bank, Halkbank, which has traditionally been one of the main providers of loans to small and medium-sized enterprises. In an IPO spread over several days at the beginning of May 2007, 25% of Halkbank raised US$1.8bn. In November 2007 the government announced plans to sell the remaining 75% of Halkbank by block sale in 2008. However, as of early January 2008, it was

12 Turkey


unclear when or whether the sale would go ahead, although several leading locally owned private banks were reported to have expressed an interest.

In November 2007 the government also announced plans to hold an IPO for a 49% stake in Ziraat Bankasi. However, it did not specify when it planned to hold the IPO. There were also doubts about whether the government would pay the political price of restructuring the bank to make it attractive to investors, particularly as the government plans to retain a majority stake. Ziraat has traditionally been used to dispense cheap loans to the agricultural sector, which is one of the core constituencies of the ruling Justice and Development Party (AKP). Though Ziraat Bankasi had an NPL (non-performing loan) ratio of 1.8%, compared with 3.6% in the sector as a whole, it is not subject to rigorous auditing and rolls over many of its NPLs.

Islamic finance strengthens

The stability of the financial markets and the presence in power of the moderately Islamist Justice and Development Party (AKP) enabled the Islamic finance sector to grow strongly in the five years from November 2002 through November 2007. There were four Islamic banking institutions operating in Turkey in December 2007. (These were originally known as Special Finance Houses, or SFHs, but they are now known as Participation Banks, or PBs, since the promulgation of Banking Law No. 5411, of October 2005.) At end-September 2007 the PBs had a total of 401 branches, up from 355 branches at end-2006, 291 at end-2005 and 245 at end-2004. In December 2005 the two smallest PBs, Anadolu Finans and Family Finans, merged to form Turkiye Finans Katilim Bankasi. The tie-up created the largest PB in the sector, with paid-in capital of YTL250m, and was a very rare example of a corporate merger in Turkey between two companies that were not members of the same group. At end-September 2007 Turkiye Finans remained the largest PB in Turkey by both the number of branches and staff, with 129 branches and 2,452 employees. At end-September 2007 the PB sector as a whole employed 8,688 people. The bank remained the largest player in the sector at end-September 2007, when it had total unconsolidated balance sheet assets of YTL4.9bn. In July 2007 the National Commercial Bank (Saudi Arabia) agreed to buy a 60% stake in Turkiye Finans for US$1.08bn, the largest foreign investment in the Islamic banking sector in Turkey. The deal valued the bank as a whole at US$1.8bn, implying a price-to-book ratio of 5.8, the highest ever seen in Turkey for a foreign investment. In November 2007 regulatory approval of the sale was expected by early 2008, though this had not occurred as of mid-January 2008. The total assets of the PBs rose from US$5.5bn at year-end 2004 to US$7.4bn at end-2005 and US$13.7bn at end-2006 and US$16.8bn at end-June 2007, according to figures released by the Banking Regulation and Supervisory Agency (BRSA). The proportion of the sector�s assets within the total assets of the banking sector has also grown steadily, from 2.3% at year-end 2004 to 2.4% at year-end 2005, 2.7% at end-2006 and 3.1% at end-June 2007. In February 2001 Ihlas Finans was a victim of the currency crisis. At the time, Ihlas was the largest of the six SFHs active in the sector, with around 200,000 depositors and some US$950m in funds, or about one-third of the total in the sector. Unlike deposits at commercial banks, deposits with SFHs were not covered by the Savings Deposit Insurance Fund (SDIF). Fears that other SFHs might follow Ihlas into liquidation prompted the withdrawal of an estimated US$500m from the other five companies in the sector by mid-2001. Following the collapse of Ihlas Finans, the five surviving SFHs accelerated efforts to establish a Guarantee Fund, similar to the SDIF. In October 2001 they formed the Special Finance Houses Union (renamed the Participation Banks Association�PBA�in early 2006), which is overseen by the BRSA. The PBA now administers a guarantee fund for deposits at PBs, under the supervision of the BRSA. The PBA Guarantee Fund currently covers up to YTL50,000 of each deposit. It is financed by the PBs themselves, primarily through a levy on the PBs� outstanding deposits at the end of each quarter. Membership in the PBA is compulsory for all PBs. In addition to monitoring the sector, the PBA also acts as a representative for the sector in consultations with the government on legislative and regulatory issues, as well as organising training and public awareness programmes.

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To abide by strict interpretations of Islamic teachings, the PBs attempt to construct financing instruments that do not involve the payment or receipt of interest and that closely associate profit with risk participation. PBs participate in three types of financing activity: • Mark-up financing�murabaha�is a technique under which funds are made available to companies in need of short-

term capital. A contract of sale is made between the bank and its client for the sale of goods at a price plus an agreed profit margin for the bank. The average tenor of murabaha financing usually does not exceed four or five months. This type of financing accounted for about 85% of total PB funds in late 2007.

• Financial leasing�Ijara�carries terms similar to those offered by other leasing companies. It accounted for about 10% of total PB funds in late 2007.

• Participation in business projects in which the entire capital requirement (under the mudharabah model, which is a contract between the capital provider and the entrepreneur) or a portion of the capital required (under the musharakah model, which is a partnership that combines capital) is provided, and profits and losses are shared. Participation in business projects accounted for around 5% of total PB funds in late 2007.

The legal framework for PBs� operation was established in 1983 (Decree 83/7503, of December 16th). But beginning December 2001, the PBs lost their special legislative status and became subject to the same regulatory and legal requirements as commercial banks. From October 19th 2005, they have been regulated by Banking Law 5411. Since September 2000 PBs report to and are supervised by the BRSA, the same body that oversees commercial banks, and the Central Bank of Turkey. As with commercial banks, PBs must observe weekly foreign-currency-risk ratios and report weekly to the Central Bank on their foreign-currency positions. Minimum capitalisation for a new PB is YTL30m, the same level as that for a bank. PBs must receive BRSA approval before opening new branches. They must maintain capital-adequacy ratios of 8% and cannot lend more than 25% of their total funds to a single legal person or entity. PBs may collect deposit funds from the public under a mudharabah arrangement, which accounted for around 82% of total funds collected by PBs as of October 2007, and �special current accounts� (current accounts without any interest), which made up the remaining 18%, according to data from the BRSA. PBs must meet a reserve requirement for Turkish lira participation and special current accounts of 6%. On foreign-currency participation and special current accounts, they must maintain reserves of 11%. Until recently, the main constraint on growth of the Islamic finance sector was the continuing economic and financial uncertainty and competition from the very high yields on commercial bank deposits or repurchases of Treasury bills. Even devout Muslim investors often preferred the predictably high return on classical banking instruments to the less predictable, non-interest return on accounts at PBs. However, the absence of economic instability and the continued electoral strength of the moderately Islamist AKP government bode well for the future of Islamic financing.

Top ten foreign banks Ranked by assets at end-September 2007�US$ m

Bank Assets Market share (%) Finans Bank (Greece) 15,636 3.6Denizbank (Belgium/France) 10,671 2.4HSBC (UK) 9,779 2.2Fortiis (Belgium) 7,601 1.7Citibank (US) 3,958 0.9Tekfenbank (Greece) 1,864 0.4Deutsche Bank (Germany) 1,439 0.3Millennium Bank (Portugal)* 921 0.2ABN AMRO (Netherlands) 740 0.2Societe Generale (France) 537 0.1Total market 436,053 100.0

* Owned by Millennium of Portugal through its Greek subsidiary.

Source: Banks Association of Turkey.

Many of the foreign banks currently operating in Turkey have entered the market since 2003, mostly through the acquisition of locally owned banks.

Foreign banks

14 Turkey


Most of the longer-established foreign banks entered in the 1980s, attracted by the liberalised foreign-trade and foreign-exchange regime. In contrast with emerging markets in much of Eastern Europe and Latin America, until recently they remained relatively small and did not make major acquisitions in Turkey. However, there was another upsurge of foreign interest starting in late 2006, particularly in retail banking. The two main reasons for the renewed foreign interest were macroeconomic improvements (particularly strong growth and a sustained period of economic stability) and the prospect of Turkey joining the EU, which received a major boost with the official opening of accession negotiations on October 3rd 2005, but which appeared to have stalled as of January 2008.

At end-November 2007, 17 commercial, development and investment banks were majority foreign-owned, the same number as one year earlier. Ten of the majority-owned banks were locally incorporated and seven were branches of foreign banks. Another 49 foreign banks had representative offices as of November 2007, through which they were developing their correspondent relationships and booking trade finance. All of the foreign banks are headquartered in Istanbul.

In September 2007 majority-owned foreign banks accounted for 12.6% of the Turkish banking system�s assets, 11.7% of total deposits and 15.6% of total loans, according to the Banks Association of Turkey. However, these figures understate the importance of foreign-owned banks. Their contribution to the banking sector�through training, example and efficiency�has been significant. Some foreign banks co-ordinate their regional activities through their local branches. For example, Citibank oversees its operations in the Central Asian republics from its branch in Istanbul.

Leading foreign banks are Finans Bank (Greece), Denizbank (Belgium/France), HSBC (UK), Fortis (Belgium) and Citibank (US). Other Western European banks are also well represented in the country. The first foreign bank to begin retail-banking operations through a branch network in the country was Citibank in the early 1990s. It was followed by HSBC in early 2000. However, there was a sudden surge in foreign entries from 2006 onwards. The reasons for the increase include political stability and strong economic growth from 2002 onwards, as well as expectations that Turkey was moving toward EU membership. At end-November 2007, 17 majority foreign-owned banks were conducting retail banking operations through a branch network in Turkey, up from six at end-November 2006.

There was also a sudden upsurge in foreign acquisitions in the Turkish banking market in 2005 and 2006. The pace of acquisitions slowed, but still continued through 2007. Major recent deals include the following:

• At end-December 2006 the BRSA�Bankacilik Duzenleme ve Denetleme Kurumu (the banking supervisor)�approved the sale of a 91% stake in MNG Bank to Arab Bank (Jordan) and Bank Med of Lebanon for US$160m.

• In February 2007 the BRSA approved the sale of 70% of the commercial bank Tekfenbank to EFG Eurobank of Greece, for US$182m.

Turkey 15


• In March 2007 Bank TuranAlem of Kazakhstan bought a 33.98% stake in the commercial bank Sekerbank for YTL424m.

• In August 2007 the National Bank of Kuwait (NBK) announced it had agreed to buy a 40% stake in the commercial Turkish Bank for US$160m.

• In December 2007 the BRSA formally approved the sale of a 100% stake in the commercial bank Oyak Bank to ING of the Netherlands for US$2.67bn. Oyakbank had previously been majority-owned by the Turkish military�s pension fund Ordu Yardimlasma Kurumu (OYAK). At end-September 2007, Oyakbank was the eighth-largest bank in Turkey, with assets of US$10.1bn, and a market share of 2.3%.

• However, during 2007, there were also signs that the Turkish authorities were tightening the criteria for acquisitions in the Turkish banking sector. In August 2007 the BRSA blocked two acquisitions: the sale of the commercial bank Adabank to the International Investor Company (TII) of Kuwait and the sale of the commercial bank Alternatifbank to Alpha Bank of Greece. For Adabank the BRSA cited what it claimed was TII�s lack of sufficient financial strength. For Alternatifbank the BRSA cited what it claimed was insufficient transparency and financial strength.

Foreign-owned, locally incorporated banks and foreign banks opening a branch are subject to the same capital requirements as commercial domestic banks, namely a minimum of YTL30m. They are subject to the same laws and regulations that apply to Turkish-owned commercial banks, including limits on lending to a single borrower or on buying shares in an industrial or other financial group.

Foreign banks have been undeterred by the suicide bomb attack on the HSBC headquarters in Istanbul on November 20th 2003. The attack�one of four on British and Jewish targets in Istanbul in the space of five days�killed three of the bank�s employees, injured many more and devastated the building housing the bank�s office. In the immediate aftermath of the blast, HSBC announced it was committed to remaining in Turkey, a sentiment echoed by other foreign banks already operating in the country. However, the attack did force banks to review their security measures, particularly for their expatriate staff.

Top ten brokerage firms Ranked by value of trades during January-October 2007�YTL m

Bank Value of trades Market share (%)Is Yatirim Menkul Degerler 41,684.4 6.3Ak Yatirim Menkul Degerler 34,656.3 5.2Deniz Yatirim Menkul Kiymetler 32,988.1 5.0Finans Yatirim Menkul Degerler 32,835.4 5.0Raymond James Yatirim Menkul Degerler 29,032.4 4.4Yapi Kredi Yatirim Menkul Kiymetler 28,319.4 4.3Garanti Yatirim Menkul Kiymetler 26,860.7 4.1TEB Yatirim Menkul Degerler 23,858.6 3.6Ekspres Yatirim ve Menkul Degerler 22,473.9 3.4EFG Istanbul Menkul Degerler 21,835.3 3.3Total market 660,162.3 100.0

Source: Calculated from Istanbul Stock Exchange data.

Investment banks andbrokerages

16 Turkey


The main legal difference between commercial and investment banks is that the latter may not accept deposits. Commercial banks may engage in securities underwriting and bond, bill and repo trading. Private domestic investment banks are relatively recent arrivals on the Turkish financial scene, but their numbers grew rapidly in the late 1990s. Before the 1980s the capital markets were undeveloped, and most corporate financing was obtained from large retail banks, government institutions and rediscounting facilities at the Central Bank of Turkey.

Six new investment banks began operations in 1999, all of them owned by large domestic holdings or conglomerates and focusing primarily on meeting the investment needs of their owners� other interests. Several other domestic holdings had announced plans to found their own investment banks, but the financial crisis that broke in 2001 prevented this and precipitated the closure of two of the banks that had been founded in 1999�Okan Yatirim and Atlas Yatirim. No new investment banks were founded between 2000 and end-2007.

The Istanbul Stock Exchange had 145 banks and brokerage houses as members as of end-2007, virtually all of which are based in that city, although some have branches in other big cities. Brokerage houses, 104 in total, are authorised to trade shares on the stockmarket, and most (92 as of end-November 2007) are authorised to trade on the bonds-and-bills market. Since January 1997 banks have been barred from conducting stockmarket activities, except through brokerage houses, but banks may trade bonds and bills.

Among the most important share traders during 2006 were Ak Yatirim Menkul Degerler, Deniz Yatirim Menkul Kiymetler, Garanti Yatirim Menkul Kiymetler, Is Yatirim Menkul Degerler, Raymond James Yatirim Menkul Degerler, Turk Ekonomi Bankasi (TEB), and Yapi Kredi Yatirim Menkul Degerler. Each of these companies had market shares of 3�7%.

A total of 133 institutions are authorised to trade on the bonds-and-bills market, including 92 brokerage houses, 29 commercial banks, and 12 investment and development banks. Commercial banks are the main brokers for bonds and bills and in the very large market for repurchase transactions. The largest bond-and-bill broker for the first 11 months of 2007 was Garanti Bankasi, with a market share of 7.7% in this activity, followed by HSBC (6.8%), Oyak Bank (6.3%), Yapi Kredi Bank (4.8%) and Akbank (4.3%). Investment banks play a much more modest intermediary role in these markets.

There are three main institutions in Turkey that provide development-banking services: the Turkish Industrial Development Bank, the Turkish Development Bank and Iller Bank.

The leading provider of long-term foreign-exchange loans and local funding for industrial investments is the Turkish Industrial Development Bank (Turkiye Sinai Kalkinma Bankasi�TSKB), which will finance as much as 50% of an approved project�s cost. There are no set criteria for projects that receive approval, other than the perceived soundness of the investment plan. Credit generally is extended for six- to seven-year periods. TSKB also distributes medium- and long-term credits from international agencies and banks such as

Development and postal banks

Turkey 17


the European Investment Bank and the Islamic Development Bank. In 2006 TSKB extended total funding, in the form of Turkish lira and foreign-exchange medium- and long-term credits plus leasing, of US$631m, up from US$491m in 2005 and US$424m in 2004.

Another important medium- to long-term lender is the Turkish Development Bank (Turkiye Kalkinma Bankasi�TKB), formed in 1988 from the State Industry and Workers� Investment Bank, which had previously and unsuccessfully provided credits to workers� corporations locally and abroad. In addition to supporting investment projects through medium- and long-term credits and guarantees, TKB provides short-term financing facilities. Almost all of the projects financed by the bank are in industry, mainly manufacturing and tourism. In 2006 TKB extended Turkish lira and foreign-exchange long-term credits of US$97.5m, down from US$124.2m in 2005 and US$160.2m in 2004. In 2006, 51% of the projects financed by the bank were in the manufacturing industry, 36% in tourism, 7% in services and 6% in energy.

Iller Bank is a key player in the financing of municipal development and issues guarantees for municipal loans. According to the Banks Association, at end-September 2007 the bank had total balance sheet assets of US$4.4bn including US$3.3bn in loans, all in Turkish currency.

There are no postal banks in Turkey.

There are no offshore banking centres in mainland Turkey. However, there is a less stringent regulatory environment in the Turkish-Cypriot administered north of Cyprus, which remains outside of international jurisdiction. The self-proclaimed �Turkish Republic of Northern Cyprus�, or TRNC, has been recognised only by Turkey. This has encouraged many local interests, including some of dubious probity, to establish banks there, which they use to channel funds to global markets.

Inevitably, the more relaxed regulatory environment has also encouraged speculative practices. In mid-2000 a liquidity crisis in the TRNC resulted in the collapse of a string of offshore banks, most of which had a high percentage of deposit holders from mainland Turkey. The government in Ankara agreed to finance a bailout package for the TRNC while insisting that the Turkish Treasury and the TRNC Central Bank be jointly responsible for the supervision and regulation of banking in the TRNC. The Turkish Treasury and the Central Bank of Turkey are now both intimately involved in the regulation of TRNC�s banking sector. However, in late 2007 doubts remained about how tight this regulation was in practice, and deposits held in the TRNC remained excluded from the state guarantee on deposits made in banks in mainland Turkey.

Other financial institutions

Turkey�s banks are influential in all aspects of finance and control many major non-banking financial institutions with subsidiaries. Insurance companies are important players in Turkish finance, but, per capita, Turks spend less on insurance than any other people in the industrialised world. Factoring and

Offshore banks

Overview

18 Turkey


leasing companies are important, but the major players are subsidiaries of Turkey�s banks. The venture-capital industry remains small.

Top ten insurance companies (non-life) Ranked by premium income in first nine months of 2007�YTL m

Insurer Premiums Market share (%)Anadolu Insurance 846.1 12.1Axa-Oyak 823.4 11.8Koc Allianz 642.4 9.2Aksigorta 594.0 8.5Ergo Isvicre 468.4 6.7Gunes Insurance 467.0 6.7Yapi Kredi 429.1 6.2Basak Groupama 345.3 5.0Eureko 301.7 4.3T. Genel 243.2 3.5Total market 6,971.3 100.0

Top ten insurance companies (life) Ranked by premium income in first nine months of 2007�YTL m

Insurer Premiums Market share (%)Anadolu Hayat Emeklilik 250.7 23.8Basak Groupama Emeklilik 159.2 15.1Garanti Emeklilik 86.6 8.2Aviva Hayat ve Emeklilik 73.6 7.0Yapi Kredi Emeklilik 72.6 6.9Vakif Emeklilik 62.0 5.9American Life 60.6 5.7Axa Oyak Hayat 60.6 5.7Koc Allianz Hayat ve Emeklilik 60.4 5.7Ak Emeklilik 43.4 4.1Total market 1,054.4 100.0

Source: Association of Insurance and Reinsurance Companies of Turkey.

As of end-2007, a total of 24 non-life and 20 life/pension companies were active in the sector. All but two (Gunes and Vakif Emeklilik) were majority privately owned. Seven insurers were listed on the Istanbul Stock Exchange (ISE) at end-2007. The leading insurers, according to premium income in the first nine months of 2007, were Anadolu Insurance, Axa-Oyak (a joint venture involving the French Axa), Koc Allianz (a joint venture with the German Allianz), Aksigorta, Ergo Isvicre (which is majority-owned by Ergo of Germany) and Gunes Insurance. Each had a relatively modest market share. Anadolu had the largest market share�with 12.1% of the total market premiums�in the first nine months of 2007.

Most Turkish insurance companies are subsidiaries of banks, and an often stipulated condition of bank credit is that borrowers use the services of the relevant insurance subsidiary. Anadolu is owned by Is Bankasi, Axa-Oyak by Oyakbank, Koc Allianz and Yapi Kredi by Yapi Kredi, Aksigorta by Akbank, and Gunes Insurance by the state-owned Vakifbank.

There are two reinsurance firms registered as operating in Turkey: Milli Reasurans and Arti Reasurans. The market has traditionally been dominated by

Insurance companies

Turkey 19


Milli Reasurans. Until end-2006 Turkish companies had to offer a minimum of 20% of reinsurance agreements to Milli Reasurans. This requirement was lifted at end-2006. During 2007 as a whole, Milli Reasurans met 30% of the Turkish insurance sector�s reinsurance requirements, with the remaining 70% being met by foreign reinsurers.

The liberalisation of the insurance sector in 1990 led to a rapid increase in the number of companies. However, the economic recession of 2001, combined with what were already low profit margins and intense competition, forced several closures. The sector is expected to undergo further consolidation in 2008 as the larger domestically owned insurers seek acquisitions in order to be able to compete with companies with a foreign shareholding.

In terms of insurance expenditure, Turkey returns one of the lowest figures in the industrialised world. The sector, particularly the health and life sub-sectors, was hard hit by the economic crisis that broke in February 2001. Despite an economic recovery in 2002, per-capita insurance expenditure grew slower than the economy as a whole, and it was only in 2003 that it returned to pre-crisis levels. Per-capita insurance expenditure stood at US$92.6 in 2006, up from US$80.9 in 2005, US$71.2 in 2004 and US$51.6 in 2003, according to the Association of Insurance and Reinsurance Companies.

Traditionally, the main reasons for the low per-capita premium income are Turkey�s low levels of personal income and a highly inflationary economic environment. Growth has been further hindered by a legislative vacuum and collection difficulties, with many private insurance agencies (licensed by a parent company) opting to place premiums in short-term, high-yield investments before forwarding them to insurance companies. Although annual inflation has recently fallen to single digits, low income levels still remained an impediment to growth in late 2007. The fall in real interest rates from 2003 onwards meant that, particularly for low-income groups, credit cards emerged as an alternative to insurance coverage. Given their low rates of disposable income, many lower-income groups preferred not to incur the extra burden of premium payments, calculating that they could meet any sudden unforeseen expenditure by credit card.

Total insurance premiums of US$6.8bn were equivalent to 1.68% of total GNP in 2006, up from 1.62% (US$5.8bn) in 2005 and 1.58% (US$5.1bn) in 2004, according to the Association of Insurance and Reinsurance Companies of Turkey. Non-life premiums totalled US$5.79bn in 2006, up 18.2% from US$4.90bn in 2005. Total life premiums rose to US$968.3m, up 4.5% from US$926.3m in 2005. In November 2007 industry sources predicted that total premiums for 2007 would be around US$7.5bn (about YTL8.5bn at end-2007 exchange rates).

Accident insurance continued to account for the largest share of total premiums in 2006, at 37.4% of the total non-life premiums, or US$2.2bn. However, total accident coverage remains very low. In November 2007 industry sources reported that they believed that less than half of the vehicles registered in Turkey had the legally compulsory third-party accident coverage. In 2006 accident insurance was followed by fire insurance, at 19.1% of total non-life premiums (US$1.1bn), and health insurance, at 11.9% (US$687.6m).

20 Turkey


At end-November 2007 industry sources estimated there were around 12,000 licensed insurance agencies, of which approximately one third were in Istanbul, although industry sources report that only around 5,000 were full-time agencies. Most of the remainder were companies engaged in other fields that had also acquired a licence to offer insurance-agency services. (Many automobile retailers, for example, offer minimum third-party insurance as part of a sales package.) The vast majority of agencies worked with a single insurance company. Agencies face stiff competition not only from the insurer�s head office, which sells policies directly to the public, but also from its affiliates�if an insurance company is owned by a bank, then the bank�s branches usually also serve as insurance agencies. Nevertheless, in late 2007 industry sources estimated that agencies accounted for a little more than half of total premium collection.

Regulatory changes in the early 1990s led to a surge of interest among foreign companies in the Turkish insurance sector. However, new foreign investors subsequently became cautious. Low returns meant that many companies that entered the sector in the early 1990s subsequently left, reducing the number of firms that are at least 50% foreign-owned from 12 in 1990 to five in late 2005. However, the strong economic recovery from the financial crisis of 2001 and Turkey�s closer relations with the EU led to a rapid increase in the number of foreign entrants in late 2005 through 2006 and the first 11 months of 2007. By end-November 2007, 18 companies (11 non-life and seven life/pension) were at least 50% foreign-owned, and foreigners had a direct minority share in eight other companies. Several of the acquisitions resulted from foreign firms acquiring the domestic bank that had been the insurer�s parent company. At end-2006, the Association of Insurance and Reinsurance Companies reported that if the minority foreign holdings in Turkish commercial banks that owned insurance companies were taken into account, foreign-owned companies accounted for 39% of the sector�s total capital and 67% of its premium production. Following four more foreign acquisitions during 2007, officials from the Association of Insurance and Reinsurance Companies estimated, by November 2007, that foreign-owned companies accounted for over 70% of total premium production. Significantly, in November 2007, seven of the ten largest companies in the sector had a substantial foreign ownership.

At end-November 2007 there were eight wholly foreign-owned insurance companies: AIG Sigorta (American International Group, US), American Life (American Life Insurance, US), Aviva (UK), Global Hayat (Dexia, Belgium), Emek Hayat (GEM, Bahamas), Fortis Emeklilik (Fortis Bank, Belgium/Netherlands), Generali (Generali, Italy), and Ihlas (owned by HDI, Germany).

Foreign companies with joint ventures include Allianz (Germany), Axa (France), BNP Paribas (France), Ergo (Germany), Eureko (Netherlands), Groupama (France), Liberty Mutual (US) and Mapfne (Spain). Industry sources also reported that in November 2007 more foreign companies were preparing to enter the Turkish insurance sector.

The insurance sector operated in a legal vacuum for nearly a decade, but this changed when a new Insurance Law was finally passed in June 2007 as Law No. 5684 (published in Official Gazette No. 26552, of June 14th 2007). Law No.

Turkey 21


5684 requires all insurance companies to have a minimum of YTL5m in paid-up capital, and to become members of the Association of Insurance and Reinsurance Companies within one month of their incorporation and the granting of their operating licences. Law No. 5684 also makes it illegal for the same company to operate in both the life and non-life branches. In addition to Law No. 5684, the Turkish insurance sector is regulated by a large number of communiqués and directives.

Before the passage of Law No. 5684, the industry, in effect, was operating without any legal footing. Insurance laws were last restructured in 1994, but the Constitutional Court subsequently issued a series of decisions that suspended the implementation of the amended laws and several clauses in the Turkish Commercial Code related to the insurance sector. Surprisingly, the lack of effective legislation improved morality within the sector, as without the possibility of legal recourse, transactions were based on trust and reputation, forcing a higher degree of self-regulation. However, the situation was clearly unsustainable in the longer term. Since the passage of the June 2007 Insurance law, the legislative environment remains highly fluid. For example, in November 2007 government officials predicted that over 20 communiqués and directives relating to the insurance sector would be introduced in 2008.

In spite of the progress, the European Commission�s annual Progress Report on Turkey�s accession process for EU membership highlighted a number of areas in which Turkish insurance legislation still lagged behind EU norms�particularly regarding restrictions on setting tariffs in the compulsory insurance sector (such as third-party traffic insurance) and the fact that policy conditions remain subject to approval by the Treasury. However, it welcomed other innovations introduced by Law No. 5684, such as the introduction of an out-of-court settlement body for consumer protection.

Turkish insurance companies may invest in government bonds, securities and real estate (though they may invest no more than 50% of their total assets in the latter). In recent years, companies have tended to invest the majority of their capital in government paper because of the better yields obtainable and because of the volatile nature of the stockmarket. In 2006 (latest available data) insurers held investments of YTL 12.3bn, of which 45.9% was in Treasury bills and government paper, 19.9% in direct private placements, 20.6% in bank deposits, 4.1% in real estate, and the remainder in other securities, according to the Association of Insurance and Reinsurance Companies.

Foreign insurance or reinsurance companies may operate as branches in Turkey. Foreign companies must meet the same minimum capital requirements as domestically owned insurance and reinsurance companies and must maintain the right to carry out insurance operations in their country of origin. Foreign insurers with more than one branch office in Turkey must designate one branch as the headquarters responsible for representing other branches. No separate permits are required for the opening of second and subsequent branches. However, under Article 3 of Law No. 5684, the Council of Ministers can change all rules and regulations pertaining to foreign involvement in the insurance sector.

22 Turkey


Life insurance companies complain that the current tax regime constrains further growth in the small sector. The Association of Insurance and Reinsurance Companies of Turkey continues to lobby for tax relief for life insurance premiums and the exemption of health and personal accident insurance from the banking and insurance transactions tax (banka ve sigorta muameleleri vergisi), which is 5%.

Following two devastating earthquakes in north-west Turkey in 1999, the government introduced compulsory earthquake insurance (Decree No. 587, on Compulsory Earthquake Insurance General Conditions, Official Gazette 23919, of December 17th 1999), which went into effect on September 27th 2000. The only other compulsory insurance in Turkey is third-party vehicle insurance.

Top ten private pension funds Ranked by net asset value as of end-September 2007�YTL m

Company Net asset value Market share (%)Anadolu Hayat Emeklilik 815.6 19.8Yapi Kredi Emeklilik 646.3 15.7Ak Emeklilik 600.6 14.6Garanti Emeklilik ve Hayat 508.2 12.3Aviva Hayat ve Emeklilik 409.9 10.0Vakif Emeklilik 261.4 6.3Oyak Emeklilik 247.7 6.0Basak Emeklilik 227.1 5.5Koc Allianz Emeklilik ve Hayat 218.3 5.3Fortis Emeklilik ve Hayat 124.7 3.0Total market 4,117.4 100.0

Source: Capital Markets Board.

At end-2007 there were 11 pension companies operating in Turkey, all of them former life insurance companies and the majority of them owned by banks, according to the Capital Markets Board. They operated 103 private pension funds, which had a total market value of YTL4.12bn at end-September 2007 (the last date for which figures were available), up from 102 private pension funds with a market value of YTL2.62bn at end-October 2006.

There are seven public pension funds operating in Turkey (though assets of these funds are not published). One important public pension fund is the army pension fund, Oyak, which over the years has built up a portfolio of solid investments, ranging from insurance and banking to a joint-venture automobile plant with French carmaker Renault. In October 2005 the Oyak Group paid US$2.77bn for a 46.12% stake in Erdemir, Turkey�s largest producer of flat steel, which was being sold off under the privatisation programme.

In June 2001 Turkey�s parliament approved legislation designed to encourage participation in a new voluntary private pension system by offering tax incentives to employees and employers (Law 4632, on Individual Pension Savings and Investment System, published in Official Gazette 24366, of April 7th 2001). In doing so, the government sought to encourage the growth of private pensions to reduce the burden on a costly and overloaded state social-security scheme. However, bureaucratic obstacles delayed the official launch of the first private pension contracts until October 27th 2003.

Pension funds

Turkey 23


Pension companies need to apply to the Treasury Under-secretariat for a permit and must aim to serve a minimum of 100,000 participants within the first two years of operation. There are also minimum requirements in terms of the qualifications and experience of the company�s management. Each pension company must establish a minimum of three pension investment funds with different portfolio compositions, in compliance with the limits specified by the Capital Markets Board, which has overall responsibility for regulating pension funds. Foreign-exchange and foreign capital-market instruments can also be included in the funds.

Regulations are stated in the Directive on the Foundation and Operating Principles of Pension Companies, the Directive on the Private Pension System, the Directive on Private Pension Instruments, and the Directive on the Establishment and Operating Principles of Pension Funds, published in Official Gazette 24681, of February 28th 2002. These regulations were amended by the Circular on the Establishment and Operating Principles of Private Pension Companies, published in Official Gazette 24718, of April 6th 2002; the Directive on Changes to the Private Pension System Directive; and the Directive on Changes to the Directive on Private Pension Instruments, published in Official Gazette 25107, of May 13th 2003.

Top ten mutual funds Ranked by net asset value as of end-September 2007�YTL m

Fund Fund manager Net asset value Market share (%)Is Bankasi Liquid Fund Is Bankasi 3,641.6 14.6Yapi Kredi Bankasi Liquid Fund Yapi Kredi Bankasi 3,209.2 12.9Akbank Liquid Fund Akbank 2,730.1 11.0Garanti Bankasi Apple Liquid Fund Garanti Bankasi 1,673.1 6.7Ziraat Bankasi Liquid Fund Ziraat Bankasi 1,437.6 5.8Garanti Bankasi Liquid Fund Garanti Bankasi 1,262.1 5.1Vakiflar Bankasi Liquid Fund Vakifbank 1,094.3 4.4HSBC Liquid Fund HSBC 735.5 3.0Oyakbank Liquid Fund Oyakbank 692.9 2.8Is Bankasi Liquid Fund Is Bankasi 578.7 2.3Total market 24,925.3 100.0

Source: Capital Markets Board.

By end-November 2007 banks and other financial institutions had established 287 mutual funds; 125 of these were A-type mutual funds (those with at least 25% invested in stocks), and 162 were B-type funds (all other funds), according to the Capital Markets Board. At end-September 2007 (latest available data) the funds had a total asset value of YTL24.93bn.

The leading mutual-fund managers were primarily affiliates of the main private-sector banks, including Is Bankasi, Yapi Kredi Bankasi, Akbank and Garanti Bankasi. Other important managers included units of public-sector banks, such as Ziraat Bankasi, and the British bank HSBC.

The government has sought to break the banks� monopoly over the mutual funds and make the market less volatile by shifting the emphasis of the funds from short-term speculation to medium-term management. To this end, tax incentives encourage companies and pension funds to create their own mutual

Mutual funds

24 Turkey


funds and invest in the stockmarket. Foreign banks and investment managers have set up a number of mutual funds.

Income from A-type mutual funds is tax exempt, whereas income from B-type funds is subject to 10% withholding tax.

High levels of inflation and high vulnerability to political instability have traditionally hindered long-term asset management in Turkey. The volatility of the Istanbul stockmarket means the potential for high returns is offset by a commensurate elevated level of risk. As a result, most corporations tend to place surplus funds in relatively short-term instruments.

In early 2002 the legislative framework was established for the creation of asset-management companies (Law 4743, published in the Official Gazette 24657, of January 31st 2002). This was amended by the Directive on the Foundation and Operating Principles of Asset Management Companies (published in Official Gazette 26333, of November 1st 2006), which established minimum requirements for the structure and educational background of the management of asset-management companies and set the minimum paid-up capital at YTL10m.

The Banking Regulation and Supervisory Agency (BRSA) restructured Bayindirbank, which had been taken over by the Savings Deposit Insurance Fund (SDIF) in 2001, as an asset-management company. The process was completed in late 2005 and Bayindirbank was renamed Birlesik Fon Bankasi in January 2006.

The Turkish venture-capital market is underdeveloped. Small start-ups will not usually look to venture-capital funds for seed capital, and virtually all will use their own resources. It is difficult for small start-ups to secure financing from banks. When assessing creditworthiness, most Turkish banks still tend to look for cashflow and/or assets that can be used as collateral.

There are currently five venture-capital companies in Turkey. The two main companies are Vakif Risk and Girisim Sermayesi. Vakif Risk, which is owned by Vakifbank, was floated on the Istanbul Stock Exchange in June 2000. It was followed by Is Girisim Sermayesi (owned by Is Bankasi), which held an initial public offering in October 2004. A few Turkish entrepreneurs have also sourced funding from US or European venture-capital companies.

At end-November 2007, 84 companies were licensed to conduct factoring operations, although approximately half of these companies were inactive. All of the major players were subsidiaries of banks. According to the Factoring Association (Faktoring Dernegi), factoring transactions totalled US$19.7bn in 2006 (latest available figures), of which US$16.2bn was domestic and US$3.5bn was foreign-trade related. In 2005 total volume was US$14.0bn, of which US$11.7bn was domestic and US$2.3bn was foreign-trade related.

The sector is dominated by the 44 members of the Factoring Association. These firms account for around 90% of total volume and also tend to be the only companies in the sector that are independently audited. The association is

Asset-management firms

Venture-capital and private-equity firms

Factoring firms

Turkey 25


working to define and set standards for factoring in the country. Twenty Turkish companies are members of Factors Chain International, an international association.

The major firms (all but one of which are owned by banks of the same name) are Garanti Factoring, Yapi Kredi Factoring, Is Factoring, Fiba Factoring (owned by the Finansbank Group) and Tekstil Factoring. In November 2007 the majority foreign-owned factoring companies in Turkey included Fortis Faktoring, the former Dis Faktoring, which was renamed following the acquisition of its previous parent company, Turk Dis Ticaret Bankasi, in August 2005 by Fortis of Belgium. Koc Faktoring is owned by Koc Financial Services, a 50�50 joint venture between Koc Holding and Unicredito Italiano of Italy. BNP-Paribas of France has a substantial stake in TEB Factoring, which is owned by Turk Ekonomi Bankasi (84.25% of which is owned by TEB Financial Investments, a 50�50 joint venture between the Colakoglu Group and BNP-Paribas of France).

Since the introduction of Banking Law No. 5411 in October 2005, banks have been able to apply for permission to conduct factoring and forfeiting without having to establish a separate company.

Under the new Banking Law, the BRSA is responsible for regulating and supervising factoring companies. The legal framework for factoring companies was amended in October 2006 by the BRSA Directive on the Establishment and Operating Principles of Financial Leasing, Factoring and Financing Companies (published in the Official Gazette 26315, of October 10th 2006). The directive set the minimum paid-up capital requirement for newly established factoring companies as YTL5m.

The number of leasing companies in Turkey grew from 82 at end-2004 to 84 at end-2005, before dropping to 81 at end-2006. Several of the firms were moribund and had their licences annulled in early 2007; by November 2007 the number of leasing companies in Turkey had declined to 70. Around half of the firms, including all of the major players, are owned by banks. In addition, ten investment and development banks were authorised to conduct leasing operations, as were four Participation Banks (PBs) operating under Islamic principles.

The Financial Leasing Association (Finansal Kiralama Dernegi�Fider) was formed in 1994 to collate data and lobby the government. At end-November 2007 it had 38 members, which accounted for over 90% of trading volume. Leading firms included Yapi Kredi Financial Leasing, Garanti Financial Leasing, Citilease Financial Leasing, Is Financial Leasing, Finans Financial Leasing and Vakif Financial Leasing.

Total leasing volume rose from US$2.9bn in 2004 to US$4.3bn in 2005 and US$6.3bn in 2006. The strong growth continued in 2007. During the first nine months of 2007, total leasing volume stood at US$6.8bn, of which US$3.2bn was in the services sector (including US$1.5bn in construction alone), US$3.0bn in manufacturing industry, US$428m in agriculture and the remainder in other sectors.

Financial leasing companies

26 Turkey


Under the current legislation, most leasing contracts must have a minimum term of four years, even though few leasing companies are able to access funds with a maturity of more than 24 months. The result has been that the payment schedules for leasing contracts tend to be heavily front-loaded.

During the late 1990s, a number of consumer-credit companies were established to provide loans to consumers at rates considerably more attractive than bank loans. All of the companies were established by interests involved in retailing, mostly in automobiles and electronic goods. The sector was hard hit by the financial crisis and subsequent economic recession in 2001, recording total losses of US$137.4m. Increasing economic stability in 2003�06 resulted in cheaper consumer loans from commercial banks but also led to an increase in local banks offering instalment payments on credit cards at the point of sale.

In November 2007 there were nine consumer-credit companies operating in Turkey. As of end-June 2007 (the latest date for which figures were available), they had total assets of YTL3.4bn, up from YTL3.1bn at end-June 2006, according to the Banking Regulation and Supervisory Agency (BRSA). However, almost all of them, such as Kocfinans, the largest consumer-credit company (and effectively an extension of Kocbank) were backed by commercial banks and were mainly used to provide consumer financing for goods, primarily automobiles, sold by other members of their groups. According to figures from the BRSA, at end-June 2007 (the latest date for which figures were available) the total volume of the consumer-credit companies� loan portfolio stood at YTL3.1bn, the same total as at end-June 2006; 62.8% of the companies� total portfolio at end-June 2007 was for purchases of vehicles.

Monetary system

The Central Bank of Turkey controls credit and borrowing in the country and implements monetary policy in co-operation with the Treasury Under-secretariat. The terms of this co-operation are detailed in an agreement signed between the Treasury and the Central Bank on July 30th 1997. The Ministry of Finance�s role in these policy areas is now of little importance, although it has retained primary responsibility for ensuring that laws are adhered to, taxes paid, and so forth. The levels of commercial interest rates, commissions and discounts are freely determined by the banks, however. Since November 2001, the Central Bank has been forbidden from lending to the Treasury.

Other institutions

Overview

Turkey 27


Source: Central Bank of Turkey.

Base interest rates

10

20

30

40

50

60

70Central-bank late liquidity lendingCentral-bank overnight deposit

DOAJAF07

DOAJAF06

DOAJAF05

DOAJAF04

DOAJAF03

D2002

December 2002 to December 2007End-month, % pa

In theory, the most important rates for the financial sector are the deposit rates of the Central Bank of Turkey. However, in practice, from the early 1990s to early 2003, the high real returns on Treasury bills meant that they served as the de facto base rates for the financial sector. But increasing financial stability has meant that, since early 2003, Central Bank rates have gradually reasserted themselves as the benchmark for the sector, and as of January 2008, most T-bills had not been offered since August 2006. In early January 2008, the Treasury announced it would issue a six-month T-bill later in the month.

After closing 2005 at 13.50%, the Central Bank�s benchmark overnight borrowing rate remained unchanged through the first quarter of 2006 and was trimmed to 13.25% in late April. A fall in the value of the Turkish lira prompted a hike of the rate to 15% in early June and a further increase to 17.25% late in the same month. In July 2006, in an attempt to curb inflationary tendencies, the Central Bank raised the rate a further 25 basis points, to 17.50%, where it remained throughout the rest of 2006 and the first eight months of 2007. However, in September 2007, amid increasing signs that the pace of economic growth was beginning to slow, the Central Bank trimmed the rate by 25 basis points, to 17.25%. This was followed by further cuts of 50 basis points each in October, November and finally mid-December, when the borrowing rate was reduced to 15.75%, which remained the rate at year-end 2007.

In August 2002 the Banks Association of Turkey established the Turkish lira interbank offered rate (TRLIBOR). TRLIBOR is announced daily for one week and one, two, three, six, nine and 12 months, based on quotations of YTL1m offered by leading privately owned domestic commercial banks with assets of at least US$1bn. As of end-November 2007, the system comprised 14 banks. The TRLIBOR bid rates fell slightly in 2007. For example, after starting the year at 18.1%, the three-month bid rate fell to 17.6% at end-July 2007 and stood at 16.2% at end-December. The six-month, nine-month and one-year rates fell accordingly; they started 2007 at 18.4%, 18.8% and 19.2%, respectively, but ended 2007 at 16.2%, 16.25% and 16.3%, respectively.

Base lending rates

28 Turkey


Rates on T-bills are determined in the market and vary according to maturity, amount of liquidity expected in the market, movements on the foreign-exchange market and the performance of the stock exchange. The Treasury used to issue T-bills somewhat intermittently, avoiding coming to market at times of great volatility when rates are high. However, between August 2006 and end-December 2007, it stopped issuing T-bills altogether. Treasury paper, however, is the main competitor for deposits, and banks try to ensure that their rates are comparable to those on T-bills and repurchase agreements. (Except for occasional direct sales to the public, only banks buy paper directly from the Treasury.)

The highly volatile financial environment in the past meant that the government, which was not considered likely to go into default, was seen as more reliable than a private company, which could go bankrupt. Throughout the 1990s and until the financial crisis of 2001, banks preferred to buy T-bills over making commercial loans; credit to businesses, when on offer, was priced at a considerable margin over T-bill rates. In the last few years, although the government is still seen as more reliable than private businesses, the gap of creditworthiness has narrowed, and the rate of real returns on government bills fell. Until January 2008 the government had not issued new T-bills since August 2006.

The Central Bank of Turkey, in co-operation with the Treasury Under-secretariat, implements monetary policy. The Ministry of Finance�s role in these policy areas is now of little importance, but it has the primary responsibility for ensuring that laws are adhered to, taxes paid, and so forth. The levels of commercial interest rates, commissions and discounts are freely determined by banks. Since November 2001 the Central Bank has been forbidden from lending to the Treasury.

The Central Bank has focused on monetary aggregates and the exchange rate in its conduct of monetary policy. As part of a stabilisation programme established with the International Monetary Fund, the Central Bank introduced inflation targeting as a basis for monetary policy in 2002. When it took office in November 2002, some members of the new government�the Justice and Development Party (AKP)�announced they would concentrate on growth rather than price stability. However, this was swiftly refuted by the new economics minister, Ali Babacan, who insisted that monetary policy would remain unchanged.

In early December 2006 the Central Bank governor, Durmus Yilmaz, had been optimistic that inflation would fall in 2007, setting a target for annual inflation of 9.2% by end-March 2007, 6.7% by end-June, 5.3% by end-September and 4% by end-year 2007, where it would remain through 2008. However, according to the official results, consumer inflation in the 12 months to end-November 2007 stood at 8.4%, more than double the Central Bank�s original target. Nevertheless, in late December 2007 the Central Bank remained undeterred, announcing that it expected inflation to fall to 7.1% by end-March 2007, 6.5% by end-June, 6.3% by end-September and 4% by end-year 2008.

Monetary policy

Turkey 29


The main powers used to control liquidity and influence interest rates are the Central Bank�s monetary prerogatives and Treasury borrowing. The Central Bank�s open-market operations have an important influence on the money markets. The bank also intervenes in the interbank markets to defend the Turkish lira against sudden fluctuations in exchange rates.

In November 2005, following the promulgation of Banking Law No. 5411, the Central Bank issued a communiqué setting banks� reserve requirements (Communiqué on Reserve Requirements No. 2005/1, published in the Official Gazette 25995, of November 16th 2005). The reserve requirement for Turkish lira deposits and non-deposit Turkish lira liabilities was set at 6%. For foreign-exchange and gold deposits and non-deposit foreign-exchange liabilities, the reserve requirement was set at 11%.

The Central Bank may resort to periodic closures of its rediscount windows for subsidised speciality government credit. There are two such credits available. At end-December 2007 the rediscount rate was 25%, compared with a rate of 27% for advances. The actual cost to borrowers is higher, however, taking into account lending-bank commissions and a 5% financial transaction tax on interest.

The government has kept fiscal policy tight for several years, helping to reduce its large government debt burden. (Consolidated central government gross debt was just over 60% of GDP at end-2006, compared with nearly 70% at end-2005 and almost 100% in 2001.) Under a three-year stand-by accord signed with the IMF in May 2005, which was backed by US$10bn in loans, the government committed itself to maintaining a general government-sector primary surplus (the broad public-sector balance minus interest payments) of 6.5% of GNP in 2006 and 2007. The government�s 2008 budget, announced in November 2007, aimed to achieve a general government-sector primary surplus of 5.3%, a sharp reduction from the 6.5% IMF figure, but a tightening of fiscal policy nonetheless, considering primary-surplus receipts for 2007 were expected to be about 4% of GNP. At end-December 2007 it was unclear whether the government would seek a new agreement with the IMF. There was a general consensus that it no longer needed the money, but some officials privately said that, faced with the prospect of a slowdown in economic growth and potential volatility on the global markets, Turkey might benefit from the boost to international investor confidence that would result from an accord with an IMF programme.

Because of the lagged effect of interest-rate increases in mid-2006 on debt-servicing costs, and a smaller primary budget surplus, the Economist Intelligence Unit expects the budget deficit to widen from an estimated 2.5% of GDP in 2007 to almost 3% of GDP in 2008, compared with less than 1% in 2006. We forecast that the deficit/GDP ratio will ease slightly in 2009, as interest payments/GDP start to decline again, but it will remain close to 3%. Although substantially weaker than in 2002�06, we expect the economy to show solid growth, which, combined with substantial primary surpluses and further privatisation, should ensure that the government-debt/GDP ratio continues to decline. Crucial to the medium- to long-term fiscal outlook will be the future of social-security reforms, implementation of which was delayed after a

Fiscal policy

30 Turkey


constitutional court ruling in 2006. We expect the government to implement these in 2008.

Privatisation picks up in Turkey

After 19 years during which Turkey�s privatisation programme was hampered by legal difficulties or failed to generate sufficient interest, in 2005 the government finally realised its targets, selling off many large-ticket items and receiving US$8.2bn in revenue by year-end. This compares with total privatisation revenue of US$1.3bn in 2004 and US$8.2bn in the entire period from 1986, when the programme was launched, to end-2003. Nevertheless, nationalistic opposition to the sale of what were regarded as strategic national assets, which had historically been one of the main obstacles to the privatisation programme, persist, and the conclusion of the sale of several large-ticket items was delayed by court proceedings in 2006 and 2007. For example, privatisation sales generated revenue of US$8.0bn in 2006. However, this figure is misleading, as the two largest sales, totalling US$6.9bn, were agreed in 2005 but could not be formally concluded until 2006 because of ongoing legal proceedings. The privatisation programme slowed in 2007. Privatisation revenue during the first 11 months of the year totalled US$4.2bn, well down on the previous two years but still considerably higher than the annual averages prior to 2005. Big-ticket privatisation sales during the first 11 months of 2007 include the following: • At the beginning of May 2007 a 25% stake in the state-owned Halkbank was sold by public offering on the Istanbul

Stock Exchange, for US$1.8bn. • Also in May 2007, a consortium comprising PSA Singapore Terminals (Singapore) and the local Akfen Holding bought

the management rights for 36 years to the port of Mersin for US$755m. Mersin is one of the most important ports in the eastern Mediterranean, with 23 piers, a total port area of 760,000 sq metres and an annual handling capacity of 3,800 ships.

• In August 2007 a consortium consisting of Tuvsud (Germany) and the local Akfen Holding and Dogus Holding bought the rights to operate motor-vehicle inspection stations for 20 years. The rights were sold in two lots, divided on a geographical basis, for US$300.3m and US$313.3m, respectively.

The figures for the first 11 months of 2007 do not include the sale of Petkim, the state-owned petrochemicals company. The Privatisation Administration (PA), which handles all privatisation sales in Turkey, held an auction for Petkim in July 2007. The PA had previously stated that the company would be sold to the highest bidder, subject to the sale subsequently receiving regulatory approval. The highest bid at the auction was submitted by Transcentral Asia Petrochemical Holding, a Kazakh-Russian consortium, which offered US$2.05bn, just ahead of the second-highest bid of US$2.04bn by a consortium comprising Socar (Azerbaijan), Injaz (Saudi Arabia) and Turcas (Turkey). Transcentral consisted of JSP Caspi Neft (a Kazakhstan-based oil-exploration firm) Investment Production Group Eurasia (a Kazak-owned but Russian-based real-estate investor) and GK Troika Dialogue (owned by Troika Capital Partners of Russia). The sale caused concern from analysts, who doubted that Transcentral could raise the financing for the deal, and outrage among Turkish nationalists and Islamists, who claimed that Transcentral had some Armenian owners. In October 2007 the PA reversed its previous commitment to sell to the highest bidder and announced that Petkim would go to the Socar-Injaz-Turcas consortium. The sale was still awaiting formal clearance from the Competition Board in mid-January 2008. In November 2007 the PA announced a target of US$9bn in privatisation revenue for 2008, through the following sales: • The sale of the tobacco division of Tekel, the state-owned cigarette manufacturer; in early December 2007, January 25th

2008 was set as the last date for bids. • The sale of nine electricity-generation plants belonging to the state-owned Ankara Dogal Elektrik. • The management rights of the port of Izmir. • The sale of three electricity distribution companies: Baskent Elektrik, Sakarya Elektrik and Istanbul Anadolu Yakasi. • In November 2007 the government also announced plans for the sale of the remaining 75% stake in Halkbank and a

49% stake in Ziraat Bankasi, the largest state-owned bank. Both were provisionally scheduled for 2008, although it remained unclear in January 2008 whether either sale would be held on time.

By early January 2008, there was also considerable opposition to both the transfer of the operating rights to the port of Izmir and to the sale of the three electricity companies.

Turkey 31


Currency

Turkey introduced a new currency, the New Turkish lira (Yeni Turk Lirasi, or YTL), on January 1st 2005 to replace the Turkish lira (TL). The YTL was introduced at a rate of TL1,000,000:YTL1 alongside the old, which was phased out during 2005. The planned introduction of the new currency and the changeover proved relatively trouble free, and fears that it would trigger an upsurge in inflation proved unfounded. All of the old currency had been withdrawn from circulation by end-2005. In May 2007 the government announced that, as of January 1st 2009, the word �new� would be dropped from the name of the currency, and it would once again be known as the Turkish lira (Turk Lirasi or TL). Banknotes without the word �new� will be introduced from January 1st 2009. Old YTL banknotes will be gradually withdrawn from circulation but will remain legal tender alongside TL banknotes for a period of one year, after which they can be redeemed at the Central Bank or branches of the state-owned Ziraat Bankasi for a period of ten years. After ten years, the notes will become worthless.

Following the financial crisis of early 2001, the Turkish government announced on February 21st 2001 that it was abandoning its crawling-peg exchange-rate policy and was setting the lira as a free-floating currency. The lira immediately depreciated by over 30%, sending Turkey�s financial markets into turmoil. During the following months, the Central Bank continued to allow the lira to float, intervening only to stave off major fluctuations or speculation pressure. The local currency had lost over half its value by the following October, after which it began to gain ground against the dollar and other major trading currencies.

It continued to appreciate in real terms through 2002 and 2003 and remained firm through 2005 and into early 2006, with the Central Bank making only occasional, relatively modest interventions to curb any potential major fluctuations. The Central Bank intervened more forcefully during a run on the Turkish lira in May 2006. However, a combination of a resurgence in international confidence in emerging markets and the awareness that the Central Bank held substantial reserves meant that the Turkish lira stabilised without coming under sustained speculative pressure. Despite the volatility on some international markets during the second half of 2007, the Turkish lira remained strong, appreciating against major currencies and buoyed by robust international investor confidence and continuing high real interest rates in Turkey.

Overview

32 Turkey


Source: Bloomberg.* Revaluation of the Turkish currency (TL1,000,000:YTL1) occurred on January 1st 2005.

Monthly average of the New Turkish Lira (YTL)* versus the US dollar, European euroand British pound

3.0

2.8

2.6

2.4

2.2

2.0

1.8

1.6

1.4

1.2

1.0

YTL:£1YTL:€1YTL:US$1

DOAJAF07

DOAJAF06

DOAJAF05

DOAJAF04

DOAJAF03

D2002

December 2002 to December 2007

The 2001 financial crisis had its origins in the late 1990s, when many domestic banks borrowed heavily from abroad to finance lucrative purchases of government paper. Inflation had not fallen as quickly as anticipated, leading to a real appreciation in the value of the Turkish lira. But returns on bonds and bills declined sharply during 2000 and early 2001, increasing the pressure on banks as they sought to meet their Turkish lira commitments and, more critically, to repay their foreign loans. Before giving up its defence of the currency, the Central Bank pumped US$5bn�about one-quarter of its total reserves�into its intervention in the market. Throughout late 2001 and into 2002, the Turkish lira stabilised and then firmed as the Central Bank allowed the markets to set their own rates, only intervening to prevent any sudden fluctuations.

The bank continued to allow the market to determine exchange rates through 2003 and 2004, as market confidence resulted in a steady appreciation in the value of the lira. During 2005 the Turkish lira remained firm against a stronger dollar and appreciated against the euro. However, there was a general awareness that the Turkish lira was overvalued and that at some point an adjustment was inevitable.

In May 2006 volatility on international markets resulted in a run on the Turkish lira, which fell from an average of YTL1.33:US$1 in April to YTL1.60:US$1 in June, before firming through the next months to YTL1.48:US$1 in September and then edging down in December to close 2006 at YTL1.41:US$1. Despite a continuing awareness that the Turkish lira remained overvalued, strong international investor confidence and continuing high real interest rates meant that it remained very attractive for the carry trade (ie, selling a currency with a low interest rate and using the proceeds to purchase a different currency with a higher interest rate) through 2007. After slipping to YTL1.38:US$1 at end-March 2007, the lira firmed to YTL1.30:US$1 at end-June and YTL1.20:US$1 at end-September before closing 2007 at YTL1.16:US$1. Against the euro, the lira strengthened from YTL1.85:�1 at end-December 2006 to YTL1.84:�1 at end-

Currency behaviour

Turkey 33


March 2007, YTL1.76:�1 at end-June and YTL1.71:�1 at end�September, edging down to YTL1.73:�1 in November before rallying to close 2007 at YTL1.71:�1.

The Central Bank announces its official exchange rates for the following day at 3.30 pm each business day. Banks, Participation Banks (Islamic banking institutions), foreign-exchange brokers and other authorised institutions may set their rates independently. The most commonly traded currency is the US dollar, followed by the euro. Banks may also engage in interest-rate or currency swaps.

A black market is tolerated. Known as Tahtakale, it is named for its location in the old city of Istanbul. Its importance has diminished since the early 1990s, but Tahtakale�s role in the unregistered economy is likely to ensure that, in the short term at least, it retains the potential to affect the foreign-currency market.

The lira has continued to appreciate as high domestic interest rates have continued to attract strong capital inflows, despite the global financial market turmoil triggered by the sub-prime loan crisis in the US. Nevertheless, as the current-account deficit has started to widen again and Turkish interest rates are being lowered, the Economist Intelligence Unit expects the lira to depreciate moderately against a weakening US dollar, from YTL1.20:US$1 in November 2007 to about YTL1.35:US$1 by end-2008 and an annual average of about YTL1.38:US$1 in 2009. The depreciation will be less acute against the euro�from an average YTL1.79.1:�1 in 2007 to YTL1.91:�1 in 2008�but this should help support Turkey�s export performance.

Foreign-exchange regulations

Responsibility for exchange controls rests with the Under-secretariat for the Treasury in the prime minister�s office; administration is delegated to the Central Bank of Turkey. The respective roles of the Treasury Under-secretariat and the Central Bank depend on the preferences of the government in power, the personalities of the Treasury under-secretary and the Central Bank governor, and their relationship with the prime minister. To improve co-operation, on July 30th 1997 these two institutions signed an agreement to co-ordinate their policies and delineate areas of responsibility.

Under the tripartite coalition government that ruled from April 1999 to November 2002, the Treasury and the Central Bank remained relatively free of political interference. Although individual government ministers occasionally criticised the Central Bank�s refusal to curb the continuing strength of the lira, in late 2005 the Justice and Development Party (AKP) government, which took power after the November 2002 elections, remained committed to the monetary programme agreed with the IMF in 2001. It avoided applying public or behind-the-scenes pressure to either the Treasury or the Central Bank.

However, in March 2006, the AKP government attempted to replace the outgoing Central Bank governor, Sureyya Serdengecti, whose term had expired, with Adnan Buyukdeniz. Although he was well respected in the financial community, the fact that Mr Buyukdeniz was at the time the general manager of the participation bank Al-Baraka Turk and had spent virtually all of his career in Islamic banking raised concerns that the government was putting ideology

Currency outlook

Overview

34 Turkey


before the interests of the economy. Mr Buyukdeniz�s appointment was subsequently vetoed by President Ahmet Necdet Sezer. The government then nominated Durmus Yilmaz, a career central banker, who received presidential approval and who formally took over as governor in April 2006. Nevertheless, Mr Yilmaz has a reputation for being a deeply devout Muslim.

By end-November 2007 there was still no evidence that the government had attempted to apply concerted pressure to Mr Yilmaz over monetary policy. However, it had become clear that the two differed on interest rates, with Mr. Yilmaz favouring interest-rate reductions to try to boost a slowing economy while the government was concerned about the possible impact on foreign investor confidence and the lira.

With Decree 32, of August 1989, the government significantly opened crossborder cash and capital flows, building on Law 1567, of 1935, and Decree 86/10353, of 1986. Together with subsequent amendments issued through June 1991, the decree essentially provides for full convertibility of the Turkish lira, at least from the Turkish side, to the degree that the country has been recognised by the IMF as having achieved Article 8 status. (Under Article 8 no limitation may be imposed on the buying and selling of foreign exchange within the scope of current items in the balance of payments, and profits obtained through these transactions must be freely convertible.)

Decree 32 set out to sweep away the last vestiges of the closed, protectionist regime that had been in effect prior to 1980. Individuals and companies may now open foreign-exchange accounts and transfer any amount of funds abroad through banks or Participation Banks (Islamic banking institutions), though for transfers exceeding US$50,000, the bank or special finance house involved must inform the Central Bank within 30 days of the transfer. This disclosure requirement applies to transfers from foreign-exchange deposits, but it does not apply to import, export or invisibles transactions. The tax authorities query unrequited transfers (ie, asset transfers from one country to another without the expectation of payment).

Decree 32 significantly liberalises the inward investment regime, allowing investors in the services sector to engage in commercial operations, participate in partnerships, open branches, buy shares and establish offices. Although the government could, in theory, revoke Decree 32, since it is not a law, there is little likelihood of a return to foreign-exchange controls. Turkey�s traditional course of seeking closer integration with the EU has reinforced the government�s policy of avoiding the re-imposition of exchange controls.

Legislative watchlist

Over 20 communiqués and directives relating to the insurance sector are expected to be introduced in 2008 to clarify the new Insurance Law No. 5684, which passed in June 2007. In January 2008, Turkey�s justice minister announced new regulations under a Debts Law, with 171 laws subject to the amendment process in 2008. The new regulations, which were sent to parliament in early 2008, include indexing annual rent increases to the inflation rate; annulling laws that state remaining rents have to be paid in cash if a month of rent is missed; the introduction of e-signature; and new requirements that a spouse can co-sign a lease only if the other spouse consents first.

Turkey 35


In addition, legislation is expected to pass in 2008 to abolish the state guarantee on bank deposits, following the reduction in April 2004 of the 100% guarantee to a limit of TL50bn (now YTL50,000) per account. This guarantee has been a major thorn in the side of the large domestic banks, since they have felt that smaller banks can use the guarantee as a means to offer much higher rates on deposits.

A new Foreign Direct Investment Law was enacted in June 2003 (Law No. 4875, of June 5th 2003, and Law No. 25141, of June 17th 2003) that amended Law No. 6224, �For the Encouragement of Foreign Capital� (as implemented by Decree 86/10353, of 1986, and Decree 2789, of 1992) and its subsequent amendments (Decree 95/6990, published as �Foreign Investment Framework Resolution� in the Official Gazette 22352, of July 23rd 1995, which was further clarified by the �Communiqué Concerning the Framework Resolution on Foreign Investment�, published in the Official Gazette 22384, of August 24th 1995).

Law No. 4875 removed almost all additional restrictions and requirements imposed on foreign investors and, in effect, gave them the same legal status as Turkish-owned companies under the Turkish Commercial Code. These changes included abolishing the requirement to seek a special foreign investment permit from the General Directorate for Foreign Investment (Yabanci Sermaye Genel Mudurlugu�GDFI) and a minimum capital requirement of US$50,000. From June 2003 foreign investors must merely inform the GDFI, rather than seek its permission, and, in terms of commercial operations, now have the same privileges and obligations as their Turkish counterparts. Similarly, foreign investors can now establish any form of company permitted under the Turkish Commercial Code. (Under the previous law, they could only establish a joint stock company or limited company.) However, foreign investors are still required to secure permission from the GDFI to establish a liaison office.

Despite liberal legislation, foreign investors still complain that the time required to negotiate bureaucratic procedures means that, in practice, it takes at least three months before a company can begin operations. To prevent even longer delays, most foreign investors employ local �facilitators�, whose fees are generally, if tacitly, assumed to be remuneration for both their knowledge of the system and their friendliness with the responsible bureaucrats.

During the first nine months of 2007, Turkey received US$15.3 in foreign direct investment (FDI), down from US$20.0bn in 2006 but up from US$10.0bn in 2005.

Decree 32, of August 1989, opened the domestic capital markets to foreign investors. It authorises people and entities residing abroad, including investment companies and external funds, to invest in Turkish securities and freely remit all capital, dividends, interest and profits.

Portfolio investment does not require sanction from the General Directorate for Foreign Investment (Yabanci Sermaye Genel Mudurlugu�GDFI). Several international investment institutions maintain holdings in Turkish shares, mostly handled through local branches of foreign and domestic investment banks. However, the volume of foreign-owned shares on the Istanbul Stock Exchange remains vulnerable both to local price performance and to international conditions, particularly attitudes towards emerging markets.

Incoming direct investment

Portfolio investment

36 Turkey


Tax consequences. As of January 1st 2006, resident corporations became liable to a withholding tax of 10% on capital gains derived from the trading of listed stocks that had been held for less than one year. The tax is the final rate of tax and is credited against resident corporations� corporate tax liability. For non-resident corporations and individuals, the withholding tax is applied at a rate of 0%, thus making such capital gains tax exempt.

In general, export proceeds over US$50,000 must be repatriated within six months. If a firm repatriates 70% of proceeds within 90 days, however, the remaining 30% is at free disposal. With approval from the Treasury Under-secretariat, companies exporting from Turkey may retain their export proceeds to pay for imported capital goods and raw materials, and to meet other foreign-currency needs. Leading and lagging are permitted in Turkey.

The duty regime published in the Official Gazette of December 31st 1995 aligned Turkey�s import regulations for third countries with those of the EU. Customs duties and the Mass Housing Fund Levy on goods from EU and European Free-Trade Association countries were abolished in 1996, in line with the Customs Union with the EU.

Tax consequences. Effective from January 1st 2005, letters of credit have been exempt from stamp duty.

The liberalising Decree 32 of 1989 allows residents to obtain cash and non-cash credits freely from abroad. Nevertheless, foreign-exchange loans of longer than one year must be registered with the Treasury Under-secretariat. Pre-financing, commodity and acceptance credits cannot exceed a one-year term.

Tax consequences. Foreign loans secured by institutions other than banks and financing companies are subject to a 3% Resource Utilisation Support Fund (RSUF) levy on the interest.

Non-residents or companies face the same conditions as residents when borrowing locally.

No restrictions apply on capital repatriation. Foreign investments set up under Decree 30, Decree 86/10353, Decree 32, Decree 92/2789 or other specific legislation may liquidate their holdings. When they do so, the Central Bank must provide an exchange permit.

Sales and purchases by foreigners of existing companies in Turkey may be conducted based on values agreed by the parties themselves. The General Directorate for Foreign Investment (Yabanci Sermaye Genel Mudurlugu�GDFI) must simply be notified of the transaction.

No restrictions apply on the remittance of dividends and profits once tax obligations have been met. Companies may remit dividends and profits through their own banks or special finance houses.

Restrictions on trade-relatedpayments

Loan inflows and repayment

Non-residents borrowinglocally

Repatriation of capital

Remittance of dividends andprofits

Turkey 37


Multiple remittances per year are permitted, provided that the bank involved submits a tax statement and tax accrual and payment slips to the authorities within a reasonable time.

Tax consequences. If dividends are distributed for profits on revenue in tax year 2007, a withholding tax of 15% is applied to the 80% of taxable income remaining after the deduction of the basic corporation tax rate of 20%.

Royalties and fees from licensing and technical assistance agreements, etc, may be remitted. The authorities reserve the right to inspect the accounts and records of the licensee to verify that remittances are proper.

Tax consequences. Royalties and fees remitted abroad are subject to withholding tax, payable by the remitter on behalf of the recipient. The general rate for independent professional service payments (including management and consultancy fees), for technical-service fees, for real-estate rentals and for royalties is 20%.

Bilateral tax treaties, particularly with other countries of the OECD, often reduce the royalty withholding-tax rate to around 10%. Provided certain conditions are met, such as a less-than-six-month stay in Turkey, or rendering of services outside the country, the independent professional income tax rate may be reduced to zero.

Both residents and non-residents may open local foreign-exchange accounts with banks and special finance houses, and may freely dispose of the funds therein. Residents may also hold foreign-exchange accounts in banks outside the country. Non-residents may open Turkish lira accounts with banks and Participation Banks (PBs, Islamic banking institutions) in Turkey, and may transfer freely the accrued interest and principal amounts in Turkish lira or foreign exchange. Although no disclosure requirements are binding on the holders of foreign-exchange deposits, banks and PBs must inform the relevant authorities at the Central Bank of transfers from these deposits in amounts above US$50,000, or its equivalent in other currencies, within 30 days.

In Turkey netting is mainly used by local companies to offset payments for (imported) investment goods against export receipts (that is, trade transactions). In the financial sector, netting is extremely rare, although local banks do engage in �net settlement� deals, a form of unofficial forward transaction that operates on the basis of mutual trust and under which the parties involved pay only the profit or loss accruing at the maturity date of the agreement�that is, full repayment or reimbursement is not applied. There is, as yet, no legislation in Turkey governing the use of netting.

Taxation and investment incentives

A new corporate income tax law was brought forward in June 2006 (Law No. 5520, of June 13th 2006, published in Official Gazette 26205, of June 21st 2006). Law No. 5520 further simplified existing tax legislation but left the basic rate of corporate tax unchanged at 20%. The law was amended by the Council of

Remittances of royalties andfees

Hold accounts

Netting

Overview

38 Turkey


Ministers� Decree No. 2006/10731 (published in the Official Gazette 26237, of July 23rd 2006), which raised the withholding-tax rate applied to distributed dividends from 10% to 15%.

Other recent amendments include the introduction of inflation accounting (Law No. 5024, published in the Official Gazette 25332, of December 30th 2003).

Turkey�s overall tax burden may still be described as moderately heavy, although tax-based incentives and exemptions that have been retained allow corporations to reduce their effective rates.

There are two classes of corporate taxpayers: (1) Full taxpayers are companies whose main business offices or legal centres, as stated in the articles of association, are in Turkey. They are taxed on both their income in Turkey and their income from other countries�but not on a parent�s income in other countries. (2) Limited taxpayers are branch offices whose legal head office and business centre are abroad. They are subject to taxation only on income derived in Turkey.

There are no significant potential tax benefits to organising as a local limited-liability company versus a branch. However, there are no overall minimum equity requirements for a branch unless there are sector-specific requirements for the field in which it is to operate.

The main problem with the local tax structure is that it frequently changes. It is advisable to engage an accounting firm or independent tax adviser specialising in foreign companies. Many international accounting firms maintain offices in Turkey.

Tax morality is moderate to strong among large corporations and generally weaker in smaller, private companies, despite regular controls and fines. Some foreign investors claim that this puts them at a comparative disadvantage. Individual members of a company�s board of directors are personally responsible to the authorities for tax debts the company fails to pay. Tax inspectors from the Ministry of Finance make spot checks of returns.

Under the system in effect from January 1st 2008, corporations� profits, adjusted for exemptions and deductions, are subject to 20% basic corporate tax. If profits are distributed, then the 80% of taxable income remaining after the deduction of corporate tax is subject to a further withholding tax of 15%. However, if profits are retained, then only the basic corporation tax rate of 20% applies.

In addition to corporate tax, a number of small municipal taxes apply. These include a 0.5% annual levy on the nominal value of office buildings (the value is set by municipal officials) and a �garbage� tax payable by the occupants of all types of buildings that benefit from municipal services.

Companies must pay an advance tax whereby the corporate tax is paid a year in advance. For tax year 2007, the rate was set at 20% of the company�s estimated tax liability for the current year, based on the tax it paid in the previous year, payable on a quarterly basis, with the balance due at the end of the year. Any difference between the estimate and the actual amount paid is

Corporate tax rates

Turkey 39


settled at the end of the financial year when the company�s actual tax liability is calculated.

There were a series of tax amnesties granted by the government in 2003 and 2004, but none in 2005, 2006 or 2007. In Turkey, tax amnesties allow those who owe tax, either because of falsifying information or simply not declaring their income, to pay without penalties for late payment.

For more information on corporate and personal taxation, see the Economist Intelligence Unit report Country Commerce Turkey.

Taxable income is defined as the income derived from the activities of a company, minus eligible business expenses. The income of non-resident companies is subject to corporate tax only if the income is derived from local sources. These Turkish-sourced commercial profits are assessed in the same way and taxed at the same rate as those of resident companies. Foreign-resident companies are subject to the same tax rates as domestic companies and are eligible for the same incentives. Non-resident companies are defined as those with no permanent establishment in the country.

No significant potential tax benefits apply to organising as a limited-liability company versus a branch. Bank subsidiaries may, however, revalue their fixed assets on a quarterly rather than an annual basis (as branches must do)�a significant advantage in maintaining real lending limits in a highly inflationary environment.

Fixed assets are subject to depreciation over rates determined by the Ministry of Finance based on the �useful life� concept. These rates are announced annually by the Ministry of Finance in the first quarter of each year and tend to vary from 2% to 50%. Companies can generally choose between the straight-line and declining-balance depreciation methods for the depreciation of tangible assets. The applicable rate for the declining-balance is twice that of the straight-line method. However, there are some items for which the declining-balance method cannot be used and, when it is used, the maximum applicable rate is 50%.

Potential investors should be aware that the Turkish government holds a company�s board of directors personally responsible to the tax authorities for any social-security or tax debts that the company fails to pay�regardless of whether carelessness or bad intent is proven.

The complex, rapidly changing and often confused nature of Turkish tax regulations means there are many potential tax traps and an almost equal number of methods of circumventing them. It is advisable to engage an accounting firm or an independent tax adviser specialising in foreign companies. Many international accounting firms maintain offices in Turkey.

As of end-November 2007 there were 20 free-trade zones in Turkey, regulated by the 1985 Law on Free Trade Zones, which makes investment in the zones attractive by allowing the stocking or processing of goods without applying customs duties. Sales into the Turkish domestic market from the free-trade

Taxable income defined

Tax traps

Incentives

40 Turkey


zones are allowed, subject to a fee of 0.5% of the transaction value. Amendments to the free-trade legislation introduced in early 2004 abolished exemptions from corporate and other income tax for operations in free-trade zones (Law No. 5084, on Changes to Various Laws Related to Investment and Employment Incentives, of January 29th 2004, published in Official Gazette 25365, of February 6th 2004, which amended Law No. 3218, on Free Trade Zones, and Decree 564, published in the Official Gazette of July 26th 1985).

However, an exception has been made for companies involved in production (manufacturing) that have been granted an exemption from corporate tax until Turkey enters the European Union. Companies that had already obtained a licence prior to the introduction of Law No. 5084 remain exempt throughout the period for which the licence has been granted, after which they become liable for taxation. Individuals working in companies that were established before the introduction of Law No. 5084 are exempt from income tax until year-end 2008.

Most tax incentives were abolished in the early 1990s. However, Law 4369, of July 1998, introduced a 200% tax exemption, resulting in a subsidy for industrial investments in excess of US$250m. It was the first time that such a large tax exemption had been included in an investment incentive regime.

In early 2004, under pressure from the IMF and in order to align its regime more with the EU, Turkey overhauled its system of investment incentives through Law No. 5084. This law was further clarified by the Circular on Changes to State Assistance to Investments, published in the Official Gazette 25377, of February 18th 2004, and Law No. 5350, of May 12th 2005, on Changes to Law No. 5084, published in Official Gazette 25819, of May 18th 2005 and Communiqué No. 2005/1 on the application of energy support, published in the Official Gazette 25895 of August 3rd 2005. In late 2006 the incentives regime was extended to end-2009 (Law No. 5568, published in the Official Gazette No. 26392, of December 30th 2006).

The current investment scheme aims to support investments by providing subsidies for energy costs in what are termed �priority-development regions�. Although the concept of priority regions had been included in previous incentive schemes, in the new regime that was introduced in February 2004 they were redefined to comprise all provinces with an annual per-capita income of US$1,500 or less in 2001, which meant 36 provinces. However, following protests from businessmen and local members of the Justice and Development Party, another 14 provinces were added, taking the total to 50 as of November 2007. Areas outside the priority-development regions are divided into �developed regions�, which comprise the main metropolitan areas, and �normal regions�, that is, all areas outside the priority-development regions and developed regions.

The incentives available for priority-development regions under the scheme include subsidised energy costs, reductions in corporate withholding tax, subsidies for employer contributions to social-security payments and the provision of state-owned land free of charge for use in the construction of a plant.

Turkey 41


As a rule, incentives are available only to enterprises with an investment-incentive certificate. For domestically owned investments (that is, those with no foreign capital), the application for a certificate is made to the General Directorate of Incentives of the Under-secretariat for Treasury. For Turkish citizens, an application may not be made unless it is in the name of a company that has already incorporated locally; this requirement is waived, however, for projects involving foreign capital�the latter may apply for an incentive certificate before a company has officially been established. Foreign-owned companies need to apply to the General Directorate for Foreign Investment (GDFI). The GDFI normally takes 2�3 weeks to process an application, though this sometimes stretches to several months. A single certificate covers all incentives granted.

The incentive scheme announced in January 2004 retained investment incentives for small and medium-sized businesses announced in 2001 (Communiqué 2001/1, Regarding the Implementation of State Assistance for Investments and the Investment Incentive Fund, published in Official Gazette 24322, of February 18th 2001, as amended by the Decree on State Investment Incentives No. 2002/4367, of June 10th 2002, published in the Official Gazette 24810, of June 12th 2002).

Small and medium-sized enterprises (SMEs) are divided into three categories: (1) micro-sized enterprises, which employ up to nine people; (2) small enterprises, which employ 10�49 people; and (3) medium-sized enterprises, which employ 50�250 people. Incentives are available for investments by these enterprises in manufacturing or agro-industry, with a total value of up to YTL950,000; tourism outside Cappadocia and the Aegean and Western Mediterranean coastal zones; modernisation of existing tourism facilities; healthcare facilities in priority-development regions; education in priority-development regions and modernisation of primary and secondary schools in developed and normal regions; mining; environmental protection; and software development.

Incentives for SMEs include discounted loans, customs exemptions, investment allowances, financial support for expenses related to participation in trade fairs, exemptions from stamp duty, and official fees and exemptions from value-added tax.

All categories of SMEs are eligible for investment allowances of 100% in organised industrial zones, priority-development regions and normal regions. In developed regions, a 100% investment allowance is available for investments in the following areas: research and development, environmental protection, education, health, tourism, mining, and software development.

Two forms of subsidised credit are available for all SMEs: investment credits and operating credits. The maximum amount of the subsidised credits is YTL475,000 for investment credits and 20% of the total investment�up to a maximum of YTL190,000�for operating credits. If the company is not making a new investment, the maximum amount of the operating credit is YTL75,000 .

For industrial and agro-industry investments, micro-sized enterprises are eligible for credits for up to 60% of the total investment in priority-development regions, 50% in normal regions and 40% in developed regions. The rates for

42 Turkey


small enterprises are 50% in priority-development regions, 40% in normal regions and 30% in developed regions. The rates for medium-sized enterprises are 40% in priority-development regions, 30% in normal regions and 20% in developed regions. All categories are eligible for credits for the same proportion of investments in tourism and software development (40% in priority-development regions, 30% in normal regions and 20% in developed regions), education investments (50% in priority-development regions, 40% in normal regions and 30% in developed regions), and health and mining (60% in all regions).

For all SMEs, the annual interest rates for credits for procuring machinery and equipment are 10% in priority-development regions, 15% in normal regions and 15% in developed regions. The annual interest rates for operating credits are 15% in priority-development regions and 25% in normal and developed regions. (These are fixed rates and do not fluctuate with market conditions.)

Law 5084, of January 2004, removed the last remaining industry-specific incentives. However, investments in research and development, technology parks, environmental protection and technologies specified by the Supreme Council for Science and Technology are eligible for soft loans. These are available for up to 50% of the total investment cost, up to a maximum of YTL400,000. The credits have five-year terms (including a one-year grace period) and an annual interest rate of 15%. The credits are disbursed by the Turkish Industrial Development Bank and the Industrial Development Bank, which can charge up to 4 percentage points above the lending rate as commission.

For more information on investment incentives, consult the Economist Intelligence Unit report Country Commerce Turkey.

Cash management

In a market where, for over a decade starting in the early 1990s, the cost of money exceeded 100%, cash-management techniques in Turkey are well developed, though not as sophisticated as those employed in more developed OECD economies. Nevertheless, small and medium-sized enterprises (SMEs) make use of various traditional techniques. More sophisticated methods are, on the whole, restricted to the larger domestic and multinational corporations.

The use of computer connections to make payments remains the almost exclusive preserve of larger corporations, although SMEs have started making increasing use of the Internet. All of the larger domestic banks have introduced Internet banking services, but the services remain the same as on the retail level.

Most transactions carried out by larger companies and corporations are conducted through bank transfers and the use of cheques (including forward-dated cheques). Cheques normally take one day to clear in the case of transactions conducted through a single bank. The installation of an electronic automated clearing system has reduced the time required for deals to be cleared on the interbank market to one day.

Overview

Turkey 43


Many larger corporations use surplus cash to buy repurchase agreements in government paper.

Cash-management practices

Turkey�s economy has bounced back from the earlier troubles it faced in late 2000 and 2001, when an economic crisis culminated in the collapse of the Turkish lira. The sector started to become more regulated in February 2006, with the passage of Law No. 5464, the new Bank Cards and Credit Cards Law. The current combination of a strong economy, high interest rates and large population has made Turkey a new hot spot for credit-card companies. According to a July 2007 report in Card International, Turkey had 32.9m credit cards in issuance in the first quarter of 2007, making Turkey the third-largest credit-card market in the European area, following the UK and Spain. In addition, there were 56m debit cards in issue in the first quarter of 2007�with 50.1m point-of-sale debit-card purchases in 2006 compared with 1.27bn point-of-sale credit-card purchases. Many international credit-card companies have established new cards in Turkey in recent years. Notable deals include the following: • In July 2006, according to Card International, MasterCard teamed up with Garanti Bank, with Garanti reissuing 25,000

cards with the PayPass contactless credit-card feature; • In May 2007 MasterCard announced it would team up with Garanti Bank again, this time to introduce a watch with

PayPass technology�the first such watch in Europe; • Also in May 2007, Visa announced it would implement its payWave technology in Turkey; • In June 2007 China Union Pay signed an agreement with Garanti Bank to issue credit cards to 1bn consumers in China,

as well as credit cards for Turkish tourists and merchants to China

The Turkish Interbank Clearing (TIC) and Electronic Funds Transfer System is a real-time gross settlement (RTGS) system that transfers and settles payments in Turkish liras. The Turkish system implemented its version of RTGS in April 1992 and installed the second-generation system in April 2000. The TIC Electronic Security Transfer and Settlement System works in an integrated manner with the TIC-RTGS to electronically transfer and settle Turkish government securities with �delivery versus payment� principle.

The systems operate between 8 am and 5.30 pm every weekday, except for official holidays. The systems close at 1 pm on half workdays.

In the early 1990s credit terms tended to be fairly lengthy�as long as eight months in some cases. However, the worsening economic climate in late 2000 and the severe recession that followed the currency collapse of February 2001 made companies reluctant to offer credit or sales terms. However, as the business climate began to improve from late 2002 onwards, companies began increasing the lengths of credit terms, which in January 2008 were around 6�12 months for a medium-sized company and, in some cases, 12�18 months for a blue-chip company.

Negotiated value dating is normally employed as a collection procedure, and dunning (communicating with customers to ensure collection) is common. The legal process can be a long route to obtaining payment, involving protracted court cases. Concentration accounts, lock-boxes and direct-debiting are becoming more widespread but are still relatively unfamiliar.

One problem is the dearth of reliable credit information in Turkey. No statutory source of comprehensive information is available on the creditworthiness of customers, and bank information generally is shared only with other banks on

Payment clearing systems

Receivables management

44 Turkey


a special-request basis. Although Dun & Bradstreet, a US-based business-information provider, provides limited creditor-rating services, a specialised and comprehensive rating institution is still needed. In general, only larger domestic and multinational corporations carry out analyses of customer credit risk on a systematic basis.

In Turkey�s highly inflationary environment, there have traditionally been considerable advantages to delaying payments. In recent years, the use of cheques has increased, although the practice of exploiting cheque-clearing time, or �floating� the payment, is still not widespread. Companies are more likely to extend payment simply by not paying on time. Despite the greater economic stability from 2005 onwards, in January 2008, it was still not uncommon for a company to promise to pay an amount owed into an account by electronic transfer on a certain date and then fail to do so.

There are no specific regulations on cash pooling.

Securities markets

Source: Bloomberg.

Monthly close of stockmarket indices

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Dow Jones Turkey Titans 20; right scale

ISE National 30; left scale

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D2002

December 2002 to December 2007

The Istanbul Stock Exchange (Istanbul Menkul Kiymetler Borsasi�ISE) was revamped in 1986, after a comparatively moribund existence over the preceding 60 years. Although the stockmarket is still relatively small, it has grown considerably. Average daily trading volumes on the equity markets rose from US$794m in 2005 to US$919m in 2006 and US$1.4bn in November 2007.

For the first 15 years after the exchange was revamped in 1986, price movements tended to be highly volatile and were often closely linked to political developments, making the ISE extremely speculative and highly sensitive to abrupt changes in investor confidence. However, since 2005 in particular, a strong lira and a steady increase in the inflow of foreign funds into the Turkish market have meant that prices have become more resilient to outside shocks. At end-November 2007 ISE officials reported that nearly 75% of the total value of

Payables management

Cash pooling

Overview

Turkey 45


the stocks traded was held by foreign investors. However, they were also aware that foreign investors based outside Turkey were considerably more optimistic about future prospects for the Turkish economy than investors living and working in the country, thus increasing the ISE�s vulnerability to a sudden change in foreign-investor confidence.

At end-November 2007 the main market, called the National Market, comprised 292 companies, up from 291 at end-2006 and 282 at end-2005. At end-November 2007 the National Market had a capitalisation level of US$279.1bn, up from US$162.5bn at end-2006 and US$161.6bn at end-2005.

One hundred of the stocks on the National Market, representing about 90% of the total value of the market, make up the benchmark ISE National 100 Index. There are broader and narrower indices, such as the ISE National 30. The Dow Jones Titans 20 Index, established December 31st 2002, is a capitalisation-weighted index of the 20 largest and most liquid stocks traded on the Istanbul Stock Exchange.

The ISE National 100 Index closed 2007 at 55,538, up from 39,117 at end-2006 and 39,778 at end-2005. The large jump in the index was partly due to the appreciation in the new Turkish lira, which made the ISE attractive for trade. In addition, since foreign investors hold around three-quarters of the market�s free float, ISE movements are driven by their trading decisions.

Another market, originally known as the ISE Regional Market but renamed the ISE Second National Market in 2003, was founded to promote trading in stocks of small and medium-sized companies, primarily those incorporated outside the major cities, and stocks in companies that fail to fulfil the listing requirements for the National Market. There are no set requirements for listing on the Second National Market. The ISE Executive Council evaluates the financial and legal status, activities and liquidity potential of the applicant companies and, provided that there are no limitations on the circulation of shares, can approve their listing on the market. At end- November 2007, 15 companies were being traded on the Second National Market, the same number as at end-2006 but down from 16 at end-2005.

A Wholesale Market provides for trading of large volumes of stocks that are already listed on the National Market or the Regional Market, as well as for capital increases or sales realised under the government�s privatisation programme.

The New Economy Market, designed for high-tech companies, was established on March 3rd 2003 (replacing the New Companies Market, which had been established in 1995 to promote sales of stocks in newly established companies) but is effectively moribund. Only three companies had been listed on it by end-November 2007, the same number as at end-2006, but up from two at end-2005.

The Watch List Companies Market lists shares of companies under special surveillance and investigation for breaching laws, rules and regulations. Ten companies were listed at end-November 2007, up from eight at end-2006 and four at end-2005

46 Turkey


The ISE operates a Bonds and Bills Market, which is divided into an Outright Purchases and Sales Market and a Repo/Reverse Repo Market. Institutions authorised to trade on the bond market are the Central Bank, member banks and brokerage houses of the ISE Bonds and Bills Market. In December 2007 the Bonds and Bills Markets had 133 members: 92 brokerage houses, 29 commercial banks and 12 investment banks. The securities that may be traded are government bonds, Treasury bills, revenue-sharing certificates, bonds issued by the Privatisation Administration and corporate bonds.

The ISE International Market began trading in February 1997 and consists of two sub-markets: a depositary-receipts market and a debt-securities market. The regulations for the International Securities Free Zone became effective from July 1995 (Official Gazette 22353, of July 24th); regulations regarding the market�s custody and settlement operations became effective June 1996 (Official Gazette 22666, of June 14th). The International Market is located within the ISE International Securities Free Zone (enacted by Free Zone Law 3218 and defined by Decree 95/6571, of January 30th 1995). All transactions within the zone are tax free. The first trades took place on the debt-securities market on February 24th 1997. At end-2007, 27 securities, all of them Eurobonds issued by the Turkish Treasury, were being traded on the International Market. On July 25th 1997 trading began on the International Market�s depositary receipts market with 17 contracts in the commercial bank JSC Kazkommertsbank of Kazakhstan. At end-November 2007 it remained the only depositary receipt traded on the market.

The presidents of 12 securities exchanges from Eastern Europe, the Commonwealth of Independent States, Asia and the Middle East signed an agreement establishing the Federation of Euro-Asian Exchanges (FEAS) in May 1995. As of end-November 2007 the FEAS had 32 member exchanges and nine affiliate members. The FEAS, based at ISE headquarters in Istanbul, provides a single platform for listing and trading securities from the home countries of the member exchanges.

In the years immediately preceding the ISE�s 1986 re-launch, the necessary legal structure was built, including the creation of the watchdog Capital Markets Board (Sermaye Piyasasi Kurulu�SPK), based in Ankara. Companies traded on the ISE have to produce semi-annual audited accounts according to principles approved by the SPK, as well as three-month and nine-month un-audited financial statements. These principles do not require production of consolidated accounts or provisions for deferred taxation. Capital-market reforms passed in 1992 under Law 3794, of May 13th 1992, extended the SPK�s supervisory powers, making its functions comparable to those of the Securities and Exchange Commission in the US. Insider trading was banned under the 1992 law.

Corporate governance comes to Turkey

In order to raise standards of corporate governance in Turkey, the Istanbul Stock Exchange (ISE) launched a Corporate Governance Index on August 31st 2007. Eligibility for inclusion in the index is based on a corporate governance assessment by a company approved by the Turkish Capital Markets Board (CMB). When the Index was first launched at end-August

Turkey 47


2007, it included five companies. By year-end 2007 the number had increased to eight, all of them majority Turkish-owned private companies. As of end-2007 the CMB had only authorised two companies to conduct corporate-governance assessments: Saha Rating and ISS Corporate Services, the locally based subsidiary of the UK-based Risk Metrics. Companies receive a corporate-governance rating on a scale of 1�10. Any company that receives a rating of 6 or higher may be included in the corporate-governance index. In making the assessments, the ratings companies attempt to measure compliance with four key CMB standards: (1) the rights and duties of shareholders; (2) the firm�s commitment to shareholder value; (3) transparency and corporate governance disclosure; and (4) accountability (such as board structure and the manner in which it functions). If the company is rated more than once, then the latest rating is considered.

Since October 1994 all trading has been conducted electronically on the Istanbul Stock Exchange (ISE) electronic trading system. The settlement period on transactions is 48 hours.

The official working hours of the ISE are 8.30 am to 5.30 pm local time (GMT+2). The trading hours of the ISE were changed in September 2007. Stocks on the National, Second National and New Economy Market are now traded between 9.30 am and noon and between 2 pm and 5 pm each working day; those on the Wholesale Market are traded between 11 am and noon. The trading hours for the Watch List Companies Market are from 2 pm to 3 pm. Prices are allowed to fluctuate 10% either way in each session for each market.

Transactions on the Outright Purchases and Sales Market and Repo/Reverse Repo Market take place between 9.30 am and noon and 1 pm and 5 pm each working day. Same-day value transactions (in the Repo/Reverse Repo Market, same-day beginning date) are valid until 2 pm; forward transactions (in the Repo/Reverse Repo Market, forward beginning date) until 5 pm.

Because commissions are low, brokerage institutions try to engineer as wide a spread as possible between selling and buying prices. Commissions are negotiable between member and client but may not exceed 1% of the value of the trade. For trading in stocks, the ISE charges members a fee of 0.001% of the traded value.

Common stocks on the ISE are generally issued as bearer shares (unnamed and unlisted) rather than registered shares. Stocks are classified by letter (A, B, C, etc) or number (one, two, three, etc) to denote dividend, voting, bonus share and issue rights.

In 1991 the ISE Settlement and Custody Co was established to handle clearing and settlement functions. In 1995 it was granted the status of an investment bank and its name changed to Takasbank. It is owned by the ISE and members of the exchange. It provides for a full range of custody and depository services, the settlement of payments and securities obligations of ISE members, delivery and transport of securities, and insurance for securities in the process of settlement. Takasbank employs daily multi-lateral netting by crediting and debiting members� cash and securities accounts.

The Capital Markets Board (Sermaye Piyasasi Kurulu�SPK), in Ankara, acts as the initial application authority for bond and share listings. Composed of a seven-member committee appointed by the government, the SPK regulates and

Trading, clearing andsettlement

Listing procedures

48 Turkey


supervises both primary and secondary markets by enforcing reporting requirements. After approval by the SPK, the five-member Executive Council of the Istanbul Stock Exchange decides on the listing and trading of securities.

Companies that seek a listing on the main National Market must meet the following requirements:

• the shareholders� equity in the last audited financial statement of the corporation must be at least YTL13m;

• at least three years of elapsed time since the company�s incorporation and the financial statements of the last three years must have been publicly disclosed;

• the financial statements of the company for the last three years, including the last quarter, must have been independently audited annually;

• there must be no reported losses in the preceding two-year period (no losses in the previous one-year period if the market capitalisation of the publicly offered shares is at least YTL38m or if the free-float rate is at least 35%); and

• the market capitalisation of the publicly offered shares must be at least YTL20m, and the rate of the nominal value of these shares to paid-in or issued capital must be at least 25% (if this rate is below 25%, market capitalisation of the publicly offered shares must be at least YTL38m).

A number of companies (including multinationals) with substantial foreign ownership (for instance, Aviva, Brisa, Denizbank, Finansbank, Goodyear, Siemens and Tesco Kipa) are both listed and traded on the ISE, but no 100%-foreign-owned firms are listed. The SPK receives applications for listings from foreign and local companies alike.

Admission fees to the ISE are 0.1% of the nominal value of the securities to be listed. There is no minimum listing fee. The listing fees are the same for public-sector and private-sector securities. The annual listing fee is one-quarter of the chargeable initial listing fee.

For securities representing partnership rights, listing fees are fixed according to the nominal value of the securities at one time only, whereas fees for securities representing debt are based on the aggregate nominal value of the series, calculated according to the tariff determined by the ISE Executive Council. For securities representing debt, extension fees are calculated at 25% on the balance of each series, as of the end of the preceding year.

Tax consequences. Expenses for the issuance of stocks are deductible from gross income for tax purposes. However, marketing commissions paid in relation to the issuance of stocks are not deductible.

Initial public offerings

There were nine initial public offerings (IPOs) on the Istanbul Stock Exchange (ISE) in 2007, compared with 15 in 2006, nine in 2005, 12 in 2004, two in 2003, three in 2002 and just one in the crisis year of 2001. By comparison, in 2000, the last year before the crisis, there were 35 IPOs. Nevertheless, at US$3.3bn, the total value of IPOs during 2007 broke the ISE record of US$2.8bn for the highest total in a single year, which had been set in 2000. In comparison, a total of US$953.5m was raised

Turkey 49


in 2006. Foreigners played a leading role in the nine IPOs in 2007, purchasing a total of US$2.3bn in shares, or 68% of the total sold. The largest IPO in the ISE�s history also occurred in 2007, when a 25% stake in the state-owned commercial bank Halkbank raised US$1.8bn, with US$1.3bn coming from foreign investors. The largest IPOs in 2007 included the following: • In February 2007 an 18.4% stake in the airport operator TAV Havalimanlari Holding sold for US$322.4m, of which

US$222.4m was bought by foreigners. • In June 2007 a 49% stake in the real estate company Sinpas Gayrimenkul Yatirim Ortakligi sold for US$384.5m, of

which foreigners bought US$253.6m. • Later in June 2007 a 20.6% stake in the Albaraka Turk participation bank, which operates according to Islamic

principles, was sold for US$173.4m, of which US$109.2m came from foreigners. • In November 2007 the sale of a 34.5% stake in the conglomerate Tekfen Holding raised US$490.8m, of which

US$341.1m came from foreign investors. Despite the high demand for the Halkbank IPO in particular, in general, corporate and individual investors appeared wary of buying new stock in 2007. Most of the trading on the ISE was in a handful of large, well-established companies. In recent years the ISE has become heavily dependent on foreign investors, who have been attracted by the relatively high returns and continuing strength of the Turkish lira.

Several Turkish banks, such as the Turkish Industrial Development Bank, specialise in underwriting. There were nine initial public offerings on the Istanbul Stock Exchange during 2007, compared with 15 in 2006.


There is a rights market with the same settlement procedure as the equity markets. The rights exercising period is normally 15�60 days, and rights can be sold up to five business days before the end of the exercising period. Operating hours are the same as those for trading of shares on the various markets. Prices may fluctuate by up to 25% during a session, compared with 10% on the main markets.


In addition to obtaining approval from the Capital Markets Board (Sermaye Piyasasi Kurulu�SPK), Turkish companies seeking a private-equity placement must secure permission from their own general assemblies and from the Ministry of Industry and Trade (Sanayi ve Ticaret Bakanligi).

Applications to the SPK must include the following: articles of association; minutes from the previous three years of annual general meetings; a valuation report prepared by the intermediary on the share price to be offered; a specimen of the stock; financial statements for the past three years; insurance policies for all tangible and intangible assets; and all documents relating to brand, trademark and royalty rights. Private placements are exempt from some reporting requirements, such as publication of a prospectus. Existing shareholders have pre-emptive rights.

Underwritten offerings

Rights offerings

Private placements

50 Turkey


According to Decree 32, of 1989, non-residents may issue and make public offerings of securities within the prevailing framework of capital- market legislation.


In the 1990s, several Turkish companies, primarily in the financial and industrial sectors, made foreign equity issues in the form of Global Depositary Receipts (GDRs) or American Depositary Receipts (ADRs).

However, no new companies were listed in this way from 2001 to 2003. The mining company Goldas Kuyumculuk listed GDRs in January 2004, followed by the automotive manufacturer Uzel Makina in August 2004 and Denizbank in September 2004. They were followed by the commercial bank Akbank in March 2005 and the supermarket chain BIM in July 2005. There were no new listings in 2006 and only one in the first 11 months of 2007, when the pharmaceutical company EastPharma was listed in July 2007. The Bank of New York, Citibank and Deutsche Bank are the principal depositary banks.

None.

Currency and derivatives markets

The Istanbul Stock Exchange was heavily involved in the creation of the necessary legislation and regulation for the introduction of futures and options markets. Legislation necessary for derivatives trading passed in August 1997 but subsequently became mired in a turf war within the government bureaucracy. In August 2001 the Istanbul Stock Exchange launched Turkey�s first official currency futures market (Capital Markets Board Communiqué Series XI, No. 19, published in the Official Gazette 24506, of August 27th 2001). It remained the only derivatives market until February 4th 2005, when Turkey�s first derivatives exchange opened in the Mediterranean port city of Izmir. The exchange is the single provider of derivatives contracts for commodity and financial products and now includes the currency futures market, which was transferred from the Istanbul Stock Exchange. Other markets include Turkish government bonds, a futures index linked to leading shares on the Istanbul Stock Exchange and two commodity futures: wheat and cotton.

Trading in the domestic foreign-exchange markets may be carried out either within the interbank market or on the informal markets. Participants in the interbank market establish lines with each other to determine the level of exposure they are prepared to accept. Commission rates are fixed by the participants and vary according to the bank, client and prevailing market conditions. The hours of the Central Bank Interbank Money Market are 10 am to 3 pm, each working day.

GDRs/ADRs

Alternative markets

Overview

Currency spot market

Turkey 51


The foreign-exchange market has a highly developed dealer network in which most participants are equipped with electronic systems, such as Reuters terminals. Two-way quotations are therefore influenced closely by, and aligned with, international exchange-rate fluctuations. Settlements are made automatically through Reuters screens connected to a main database at the Central Bank.

The Turkish lira is convertible, and foreign entities may have Turkish lira accounts with local commercial banks. The Turkish-lira counterpart of such transactions is settled at the Central Bank through the free balances of commercial banks. Foreign-exchange counter values are settled through current accounts with correspondent banks abroad.

As the market has developed, trading lot sizes have increased. In late 2007 the average size for spot transactions was around US$1m, up from an average US$200,000�250,000 a decade earlier. Bid-offer spreads depend on transaction size. Local banks pay a 0.1% transaction tax on sales, the cost of which is included when making quotes.

Turkish banks arrange over-the-counter futures contracts in foreign exchange, both between themselves and on behalf of customers, usually for periods of one, two or three months. In practice, most forward Turkish-lira trades arranged between individual banks are overnight. Less frequently, commercial banks engage in forward transactions with the Central Bank, which strictly regulates this market.

In August 2001 the Istanbul Stock Exchange launched Turkey�s first official currency futures market (Capital Markets Board Communiqué Series XI, No. 19, published in the Official Gazette 24506, of August 27th 2001). However, this was transferred to the Turkish Derivates Exchange (TurkDEX) when the latter began trading in the Mediterranean port of Izmir on February 4th 2005. TurkDEX is the single provider of derivatives contracts for commodity and financial products. Other markets include Turkish government bonds, a futures index linked to leading shares on the Istanbul Stock Exchange and two commodity futures: wheat and cotton.

The currency futures market provides for trades in both US dollars and euros, and the contract size is US$1,000 and �1,000, respectively. The daily price limit is 10% above or below the previous day�s settlement price. The trading hours are 9.30 am to noon and 1 pm to 5.10 pm. The market commission is set at 0.005% of contract value for both buyer and seller. In November 2007 a total of 704,653 contracts were traded (up from 488,761 in November 2006), 700,968 in US dollars (486,797 in November 2006) and 3,685 in euros (1,964 in November 2006).

Tax consequences. Gains derived from transactions on futures and options exchanges are exempt from withholding tax for both resident and non-resident investors. However, gains from other futures and options transactions by resident corporations are considered capital gains and are included in the corporation�s overall tax liability.

Futures and forward contracts

52 Turkey


Options are not widely used, and there is no specific tax legislation on them.

Under Decree 32, of 1989, the Central Bank and authorised commercial banks are permitted to carry out swap financing. Though not widespread, currency and interest-rate swaps are the most common types. The technique is used infrequently for medium- and long-term borrowing. There is no specific tax legislation for swaps.

Exotics are not used in Turkey.

Over-the-counter and interbank derivatives. Forward contracts in Turkish lira are permitted for periods as long as 18 months, provided that banks stay within the short net-position limits set by the Central Bank for each bank. Bank customers carrying out such transactions are subject to a stamp duty equivalent to 0.5% of the transaction. Speculation in forward transactions is permitted.

In August 1999 banks began one- and three-month forward trading in Turkish lira on the official Central Bank-regulated interbank market. Banks may trade up to the forward trading limit, the Central Bank determines for each bank individually, according to its assets and exposure. The Central Bank is not a party in any forward trades, but merely oversees trades by other members of the interbank market.

To conduct futures trades, banks must have deposit guarantees with the Central Bank against the projected realised values of the transaction concerned. The banks also pay a commission to the Central Bank calculated as 0.0048% of the value of the transaction. In the event of the non-payment, the Central Bank converts the guarantees into cash. Until it meets its obligations, the Central Bank also charges the defaulting bank interest at a rate of 1.5 times the overnight interest rate on the interbank market on the day concerned.

The currency futures market at the Turkish Derivates Exchange (TurkDEX) falls under the regulatory authority of the Central Bank and the Capital Markets Board. The legal basis for the rules and regulations of TurkDEX is contained in The Turkish Derivatives Exchange Directive (published in the Official Gazette 25415, of March 27th 2004) and the Communiqué on the Establishment and Working Principles of the Derivatives Exchange (published in the Official Gazette 24327, of February 23rd 2001). Trades are cleared and settled through Takasbank, which fulfils the same role for securities listed on the Istanbul Stock Exchange.

Short-term investment instruments

Despite the fall in inflation from 2003 onwards, the opportunity cost of maintaining funds in non-performing accounts remains considerable, making the use of short-term investments especially important. Time deposits and repurchase agreements are the most popular short-term instruments.

Options

Swaps

Exotics

Regulatory considerations

Overview

Turkey 53


Local short-term investment instruments include bank bills, which are similar to commercial paper but can be issued only by investment and development banks.

Source: Central Bank of Turkey.

* Averages of maximum deposit rates as reported by banks to be effective during the month of reporting and weightedby volume of deposits and number of days of maturity.

15

20

25

30

35

40

45

50

Twelve-monthSix-monthThree-month

OAJAF07

DOAJAF06

DOAJAF05

DOAJAF04

DOAJAF03

D2002

December 2002 to November 2007

The demand for deposit accounts fluctuates. Some companies prefer to hold their resources in repurchase agreements rather than high-interest deposit accounts�unless they need liquidity. As of mid-December 2007, YTL208.3bn was held in Turkish lira deposits (both sight and time); of this total, YTL32.0bn was held in sight deposits and YTL176.3bn in time deposits, according to the Central Bank.

No restrictions are imposed on the maturities for time deposits. In recent years the profile of time deposits has been dominated by one-, three-, six- and 12-month terms. These instruments may be denominated in Turkish lira or any of the major foreign currencies.

One-year deposit rates rose through late 2006 and early 2007 before beginning to slightly decline in the third and fourth quarters of 2007. According to figures from the Central Bank, average interest rates on one-year deposits rose from 19.54% in January 2006 to 23.72% in December 2006. In the following year, rates went to 23.71% in January 2007 and 23.02% in March 2007 before going to 22.40% in June 2007 and 21.00% in November 2007 (the last month for which the Central Bank had released data as of end-December 2007).

Tax consequences. The annual withholding-tax rate on interest on Turkish lira and foreign-currency deposits is 15%.

Terms of issue for certificates of deposit (CDs) generally are determined by the banks, and spreads and maturities vary widely. The median rate is about 2�3 percentage points higher than that for time deposits. Considered less liquid than time deposits, CDs are not popular.

Time deposits

Certificates of deposit

54 Turkey


Tax consequences. CDs are treated in the same way as time deposits for tax purposes and interest income from them is subject to a withholding tax rate of 15%.

Source: Bloomberg.

Turkish Lira Reference Interest Rate (TRLIBOR)

10

20

30

40

50

60

70

12-monthNine-monthSix-monthThree-month

DOAJAF07

DOAJAF06

DOAJAF05

DOAJAF04

DOAJAF03

D2002

December 2002 to December 2007End-month, % pa

After years of issuing Treasury bills on a scheduled basis, the Treasury stopped issuing bills in August 2006, but announced in January 2008 that it would issue a six-month T-bill later in the month, for YTL961m. According to a government strategy paper, the Treasury aimed to stop issuing bills that matured in less than a year. T-bills basically provide a reference for lending and time-deposit rates. They are the fixed-rate instruments most commonly employed by the banks.

Tax consequences. The withholding-tax rate for resident corporations and individuals on interest earned from T-bills and bonds issued since January 1st 2006 is 10%. Interest earned from T-bills and bonds issued before January 1st 2006 is exempt from withholding-tax. Non-resident corporations and individuals are not liable to withholding tax on interest earned from any T-bills and bonds, whether issued before or after January 1st 2006.

During the 1990s repos became an increasingly popular investment option for both corporate and individual investors. Except for occasional issues bought directly by the public, government paper is bought by banks, which then sell them to investors, promising to repurchase them at a higher price at a later date.

Given the high cost of bank loans and the highly volatile economic environment, it has often been more profitable for Turkish industrialists to invest in repos than in production. However, the fall in interest rates and increased political and economic stability from 2003 onwards meant that by late-2007, although repos continued to be used, their relative importance had declined compared with the pre-2001 crisis era of high inflation. At end-December 2007 overnight repos carried an average annual return of around 15.75%, compared with about 16% on seven-day repos and 15.75% on 30- day repos.

Treasury bills

Repurchase agreements

Turkey 55


Tax consequences. The basic rate of withholding tax on interest earned on repos is 15%.

CP has not been issued since the late 1990s. Maturities for CP, when issued in the early 1990s, ranged from 90�360 days. It usually carried a return above the prevailing Treasury bill rate.

Tax consequences. The interest earned on commercial paper is subject to a withholding tax of 10%. However, capital gains derived from the sale of commercial paper are exempt from withholding tax.

Although employed by corporations to raise funds, banker�s acceptances are generally not traded but are usually retained by the issuing bank.

Tax consequences. Banker�s acceptances are tax free when issued via an intermediary bank and subject to a stamp duty when issued by a bank in its own name and appearing on its balance sheet.

Corporate financial strategies

Prior to 2004 very high local interest rates and the general shortage of domestic funds meant that foreign-owned subsidiaries tended to seek non-Turkish-lira sources, such as loans in foreign currency or capital injections from their parent companies. Their short-term financial strategy was to minimise receivables and delay payments as long as possible. However, in 2004 and 2005, the strong Turkish lira, particularly against the US dollar, reduced the competitive advantage that foreign-owned companies had previously enjoyed; what advantage they continued to enjoy tended to be in terms of the depth of the resources on which they could draw (for example, if they were affiliates of major foreign corporations), rather than the fact that the resources were in foreign exchange. The situation remained unchanged through 2006 and 2007. However, at end-2007, foreign-owned companies appeared better positioned to withstand the possible repercussions of a substantial readjustment in the long overvalued Turkish lira. Domestic banks are the primary sources of Turkish lira�denominated credit. (With the exception of the few that now have a branch network, foreign banks remain small and dependent on the interbank market for their funds.) Credit terms lengthened in 2004 and 2005, but remained stable in 2006 and were still relatively short at end-2007, unless the borrower qualified for state-sponsored long-term lending programmes. Borrowers also turn to non-bank credit from factoring of receivables and leasing of equipment. Domestic blue chips in the financial and industrial sectors are able to secure foreign syndicated loans or make Eurobond issues. Although it remains a highly volatile market, the Istanbul Stock Exchange (ISE) became an important source of finance for local companies in the decade before the 2001 financial crisis. A booming stockmarket in early 2000 persuaded a record 35 companies to list their shares. However, although stock prices on the ISE have risen rapidly in recent years, at end-2007 companies tended to see the ISE more as an investment instrument than a source of fresh funding. Most locally and foreign-owned companies looked to their existing shareholders or foreign parent companies for injections of capital, rather than the ISE. Starting in the mid-1990s, government debt offerings eventually completely squeezed out corporate issues on the domestic capital market. However, in the second half of 2006 two domestic companies (Kocfinans and Altinyildiz) issued corporate bonds, the first private bond issues in more than a decade. However, by end-December 2007, they had failed to attract significant investor interest, and there was no indication that any other companies were preparing to issue private bonds.

Short-term financing

Until relatively recently, prevailing market conditions meant that almost all bank loans extended to industry in Turkish lira were for short-term working capital. Normal operating capital, often with roll-over options, was available

Commercial paper

Banker�s acceptances

Overview

56 Turkey


from most commercial institutions, provided it was negotiated on a short-term basis. However, the increasing economic stability from 2003 onwards resulted in an increase in the availability of bank loans as banks looked for alternative sources of income to government paper. However, personal connections remained an important, and often the decisive, criterion for access to funding, and most Turkish banks remained very conservative, requiring established cashflow and assets as collateral before providing loans.

There is little difference in the financing preferences of foreign versus domestic firms, although foreign firms usually can tap the resources of large parent companies, enabling them to bypass the local market altogether.

Companies may also tap into the Islamic financing market. This local type of financing is available from Participation Banks (Islamic banking institutions). The initial legal framework for their operation was provided in Decree 83/7503, of December 16th 1983, but the overall growth of the sector had been quite slow in the market for instruments that conform to religious principles. However, the sector has been growing as the economy rebounded from the recession of 2001 and following the election in November 2002 of the moderately Islamist Justice and Development Party (AKP), which won another election in July 2007. Taxes on their leasing transactions are the same as for other such transactions, and banking operations attract the same taxes as those for standard banks.

Overdrafts are permitted only when a current-account relationship exists between a bank and its client, which must have explicit agreement with the bank for the facility. Likewise, roll-overs are negotiated on a case-by-case basis. Overdraft rates are linked to the Central Bank�s overnight rates, which act as the base rates in the economy.

Tax consequences. Provided that proper documentation is used to support interest on loans, interest paid can be tax deductible as an expense.

Rather than using overdrafts, most banks set up credit lines from which drawdowns automatically appear in the company�s current account. To arrange a credit line, full security�mortgage and individual guarantees binding the borrower and possibly a guarantor�are required.

The economic crisis of 2001 led to a dramatic decline in the volume of bank credit. As the economy emerged from recession in 2003 and through 2005, there was an increase in demand for credits and downward pressure on credit rates. Interest rates continued to edge down during 2005 before rising again from the second quarter of 2006; they remained steady through the first eight months of 2007 and then edged down during the final months of the year. At end-December 2007 borrowing rates were 6�7 percentage points above the deposit rate, depending on the quality and goodwill of the customer. The total cost to the borrower�including taxes, duties and bank commissions�could be as much as 10 percentage points above one-year deposit rates. Interest is collected at the end of each quarter.

Overdrafts

Bank loans

Turkey 57


In addition, some banks insist on blocking a portion of the credit or requiring compensating balances. No statutory limits apply on the terms and rates of short-term loans.

Tax consequences. Bank loans are subject to a stamp duty (0.5%) and a bank transaction tax (5%) on the base.

Discounting of trade bills is permitted within the general regulations relating to export proceeds. This is not a commonly employed short-term financing technique, however. If a Turkish bank is involved, it generally will require a foreign bank guarantee.

Tax consequences. Income from the discounting of trade bills is included in a company�s tax liability.

There was a small market for commercial paper (CP) in the early 1990s, but companies were subsequently unable to compete with the high real returns offered on government paper. No commercial paper was issued between 1999 and end-December 2007.

When issued, CP may be either bearer or registered. Maturities range from 90�360 days and must be made in multiples of 30 days. CP is bought and sold at a discount from face value. No rating system exists.

Promissory notes, another local form of financing, have been a major problem for financial authorities; among small and medium-sized businesses, they form an untracked system of debt instruments.

Tax consequences. For tax purposes, expenses for the issuance of CP are deductible from gross income. However, marketing commissions paid in relation to its issuance are not deductible. Promissory notes are issued and redeemed informally and, apart from a stamp duty if officially confirmed, are free of tax.

BAs are permitted and are used mainly in foreign-trade financing. Importers are subject to a maximum one-year term, with investment goods excepted.

Tax consequences. Banker�s acceptances are issued only outside Turkey. They are free of tax when issued via an intermediary bank and subject to a stamp duty when issued by a bank in its own name and appearing on its balance sheet.

The majority of domestic factoring in Turkey is discounting of cheques and bills of exchange, rather than factoring in the international sense (that is, ledger management, credit protection and finance directly related to receivables). The exception is foreign-trade factoring, which invariably is factoring in the internationally accepted meaning of the term. The vast majority of domestic factoring (industry sources estimate 70�75%) is undisclosed factoring.

Payment performance in Turkey is sometimes erratic, and factoring companies take a cautious attitude to risk, particularly since credit-risk insurance is very limited in the country. This is compounded by the fact that cheques and bills of

Discounting of trade bills

Commercial paper

Banker�s acceptances

Factoring

58 Turkey


exchange, through which most deals are conducted, still have a high failure rate, although this varies considerably by sector. The volatility of domestic interest rates and the large unregistered economy�particularly in sectors most conducive to factoring, such as textiles and yarn�have also restrained growth. As a result, factoring in Turkey is confined almost entirely to internal recourse financing (the servicing and disbursement of receivables, rather than insurance against payment failure) and to crossborder deals.

The limited range of factoring services available in the country means that most companies compete primarily on price. At end-November 2007 annual rates on factoring transactions were about 1 percentage point cheaper than commercial bank loans. Commissions are low by international standards, averaging 0.1�0.3% for foreign currency and 2�3% for Turkish lira, according to figures released by the Turkish Treasury.

Tax consequences. Factoring firms are subject to the 5% bank transaction tax; they must then charge tax again at the same rate when they lend funds to their clients.

The bulk of such deals are transacted via documentary credits. As a result of the high cost of finance, companies traditionally have tried to stretch out their payments to suppliers.

Tax consequences. The total amount paid, if properly backed by documentation, can be entered as an expense and deducted from taxes.

Large domestic conglomerates commonly engage in intercompany borrowing, but it is rare between unrelated companies or with foreign enterprises. High inflation and volatile interest rates have traditionally attached great risk to any such lending.

Tax consequences. None.

Medium- and long-term financing

Despite increased economic and political stability since 2002, medium- and long-term credit was still not readily available in Turkey at end-2007. Personal connections still played a more important role in access to funding than creditworthiness. Yet even when the customer was known to the lender, most banks were reluctant to provide medium- and long-term financing to companies unless they were members of the same group. Despite widespread concerns that the Turkish lira was overvalued and, at the very least, could not continue to appreciate indefinitely, during 2007 many larger Turkish corporations sought to meet their medium- and long-term credit needs by taking loans in foreign currency from abroad. These tended not only to be cheaper than both Turkish lira and foreign currency loans available in Turkey but, given the continuing real appreciation of the Turkish currency, offered a considerable advantage to companies earning in Turkish lira. As a result�unlike in the run-up to the currency collapse of 2001, when it was Turkish banks that had accumulated a substantial foreign-exchange short position�in late 2007 it

Supplier credit

Intercompany borrowing

Overview

Turkey 59


was the Turkish corporate sector that appeared most vulnerable to a depreciation of the Turkish lira.

Under government-sponsored programmes, development banks can provide long-term loans to companies with investment incentive certificates.

Because of prevailing market conditions, companies in Turkey have traditionally turned to various special credits that are supported by the government or issued by state institutions themselves. Improved economic stability and falling returns on government paper persuaded many banks to increase corporate lending activities from 2004 onwards, although most such credits remained relatively short term. Apart from Turkish banks� borrowing on the international market to finance their activities in Turkey, syndications or club loans are uncommon.

For industrial investments, the Turkish Industrial Development Bank (TSKB) is the most important source of long-term foreign- and local-currency funding. TSKB also acts as a distributor of loans from the World Bank and other international agencies and banks, such as the European Investment Bank. The bank can lend as much as 50% of the total cost of a project. Its credit maturities generally range from 6�7 years.

The state-owned Halkbank also provides a number of medium-term loan facilities for small businesses. In 2007 most of Halkbank�s credit was extended to industrial enterprises employing a maximum of 250 personnel (for example, up to �500,000 or the YTL/US$ equivalent over five years, with a one-year grace period).

In addition, Halkbank offers lines from the European Investment Bank (up to �1m over six years for an investment credit and over four years for an operating credit) and the European Bank for Reconstruction and Development (up to �10m over seven years). In each case the interest rates are based on Euribor (euro interbank offered rate), to which Halkbank adds an annual margin and a commission.

For agriculture and agro-industry, the main source of credit has traditionally been Ziraat Bankasi, which provides a range of loans, from short-term loans for operating capital bottlenecks to medium-term agricultural investment loans up to five years (although most have a maturity of around three years). Payments for short-term loans are usually made on a quarterly basis; those for long-term credits are made on an annual basis. At end-November 2007 typical annual interest rates for agricultural loans were around 17.5%.

Tax consequences. Bank loans are subject to a stamp duty (0.5%) and a bank transaction tax (5%) on the base. Foreign loans with a maturity of one year or less secured by institutions other than banks and financing companies are subject to a 3% Resource Utilisation Support Fund (RSUF) levy on the interest.

Financial leasing is popular in Turkey, provided by bank-affiliated companies, Islamic institutions and independent firms. The limit for total leasing contracts is 30 times the leasing company�s net worth for customers with which it has no

Bank loans

Financial leasing

60 Turkey


ownership relations, and 15 times net worth for participations and credit relations.

Since November 2005 the Banking Regulation and Supervisory Agency (BRSA) has been responsible for the regulation of leasing companies (Banking Law 5411, of October 19th 2005, published in the Official Gazette 25983, of November 1st 2005). The sector is regulated by the Law on Financial Leasing (Law No. 3226 of June 10th 1985, published in the Official Gazette 18795, of June 28th 1985) and the BRSA Directive on the Establishment and Operating Principles of Financial Leasing, Factoring and Financing Companies (published in the Official Gazette 26315, of October 10th 2006).

The minimum legal period for a contract is four years, unless the BRSA grants an exception on the grounds that the technology used or the economic benefit or operational period of the goods concerned is less than four years. Even if the contract period is four years or more, in practice the payment periods for most Turkish lira�denominated contracts tend to be considerably shorter. In November 2007 the average term was 24�30 months for Turkish lira leases and 4�7 years for transactions denominated in foreign exchange. For Turkish-lira contracts, the term runs for the legally required four years, but almost all the payments will be front-loaded and included in the first couple of years, with just a nominal amount payable at the end of the term.

Leasing companies are permitted to securitise their receivables, but lengthy bureaucratic procedures and relatively high costs compared with bank loans mean that the facility is rarely used.

The usual conditions to be met by a prospective lessee in negotiating a contract with a major leasing company include the following: (1) a minimum of three years� financial accounts, (2) predetermined debt-to-equity ratios and (3) assurances about the second-hand value of leased assets. For very specific equipment with little or no second-hand value, a bank guarantee is required. Similarly, many companies will provide leasing services to new companies, provided certain conditions, such as the provision of bank guarantees, are met.

Real-estate leases have traditionally not been common in Turkey because of low depreciation rates. Until 1996 sale-and-leaseback transactions were relatively frequent, used largely for working-capital needs and balance-sheet make-ups. However, in mid-1996 the Court of Appeals ruled that sale-and-leaseback transactions did not fall within the scope of the Law on Financial Leasing.

At end-November 2007 leasing was still cheaper than bank credits, at an average of 15�20% a year for Turkish lira payment terms up to one year. Leasing transactions denominated in foreign currency (mostly euros and dollars) were typically 12% a year for payment terms up to 12 months, 13% a year for terms up to 18 months and 14% a year for terms up to 24 months.

In addition to lower costs, the advantages of leasing for crossborder transactions include availability and deferred customs charges (paid at the end of the lease term).

Turkey 61


Tax consequences. Under current legalisation, short-term, front-loaded leasing provides clients with a tax shield. (Under front-loaded leasing, payments are clustered at the beginning of a contract�s term.) The tax base shifts from the client to the leasing company, which is able to use its large portfolio of fixed assets to fine-tune its depreciation charges and minimise its tax liabilities. In recent years, transactions have been subject to reduced value-added tax�1% on investment goods and 8% on commercial-vehicle purchases. However, at end-2007, the government unexpectedly increased the rate of VAT on leasing transactions to 18%, claiming the sector had been abusing the reduced rates and had tried to pass off payments in instalment plans as leasing transactions. The sudden increase in VAT came as a shock to the industry, partly because the government did not mention the impending increase in a mid-December 2007 meeting it had with the sector, shortly before it raised the VAT rates. In early January 2008, the sector, backed by several business organisations, was vigorously lobbying the government to reduce the increase, but there was no indication as to whether its efforts would succeed.

During the 1980s the importance of corporate bonds and commercial paper was similar to that of shares as a source of corporate finance. During the early 1990s, however, new corporate bond issues fell sharply in value and then stopped altogether as companies were reluctant to offer returns comparable to those available on government paper. No new corporate bonds were issued between 1994 and July 2006.

Turkish companies returned to the corporate bond market in August 2006 when the consumer-credit company Kocfinans issued corporate bonds. The bonds had a maturity of two years and a nominal value of YTL100m, with a simple annual return of 20.16%. The bonds had a fixed coupon rate and a semi-annual coupon. They received permission to begin trading on the Istanbul Stock Exchange Bonds and Bills Market on August 10th 2006.

In October 2006 the clothing manufacturer Altinyildiz followed with the issue of two-year corporate bonds with a nominal value of YTL20m and a simple annual return of 22%. The bonds had a fixed coupon rate and a semi-annual coupon. They received permission to begin trading on the Istanbul Stock Exchange on October 18th 2006.

However, the new issues attracted only limited investor interest, and no new corporate bonds had been floated since these two as of January 2008. During the first 11 months of 2007, the total traded volume in the two issues stood at YTL9.67m (about US$7.03m). Most of the trading that did occur took place in January and February 2007. By November 2007, the total monthly traded volume had declined to YTL220,000, or around US$190,000.

The minimum maturity for corporate bonds is two years. They may have fixed- or variable-rate coupons, and annual, semi-annual or quarterly interest payments. They may be issued with or without a bank guarantee. The maximum commission charged to clients is 0.25%.

In June 1997 Turkish banks began tapping the Eurobond market for foreign funding as an alternative to syndicated loans, their usual means of raising funds

Corporate bond issues

62 Turkey


on the international market. For example, in October 2000 Garanti Bankasi rolled over a previous US$200m issue by selling US$225m of one-year Eurobonds. Following the currency collapse of February 2001, banks returned to syndicated loans and securitisations as their main sources of funds. However, in July 2004 the petroleum products retailer Petrol Ofisi issued US$175m in five-year Eurobonds.

In August 2006, Yasar Holding, which has interests in foodstuffs, paint, paper, finance, tourism and trade, issued �200m in five-year Eurobonds. The size of the issue had originally been set at �150m but was raised to �200m on strong investor interest. Yasar Holding announced that it planned to use the money to restructure its short-term debts. However, despite the investor interest in this issue, there were no other corporate Eurobond issues in the rest of 2006 or 2007 as other Turkish companies preferred to meet their international borrowing needs through syndicated loans and securities.

Tax consequences. There are no taxes on the issuing of corporate bonds, although fees are paid to the exchange where they are listed. Expenses for issuance are deductible from gross income for tax purposes, but costs of marketing are not deductible.

Private placements of notes are subject to the same requirements as private-equity placements and require the same formal application to the Capital Markets Board.

In the late 1990s Turkish companies began to securitise receivables abroad as an alternative to bank credits as a source of funds. In all cases the securitisations took place outside the country, were underwritten by leading international financial institutions and carried ratings. Industry sources say that without a rating it would have been impossible to generate any investor interest, particularly in the US.

In October 2003 Garanti Bankasi became the first Turkish company to securitise its receivables since the February 2001 financial crisis, when it securitised US$200m in diversified payment rights in a mixture of US dollars, euros and sterling. Later in 2003 and through 2004 other Turkish banks also securitised receivables, mostly trade and payment rights, on the international market. The turning point came in August 2004, when Standard & Poor�s upgraded most of the larger Turkish banks.

In 2006 and 2007 securitisations served as an attractive alternative to syndicated loans for Turkish banks looking to secure foreign funding, with virtually all the major Turkish banks tapping the market. Diversified payment rights backed most of the deals, although several banks also securitised credit-card receivables. At end-September 2007, the total volume of securitisations outstanding stood at US$12.6bn, compared with a figure of US$12.9bn for syndicated loans. Private deposit banks accounted for all of the securitisations.

Tax consequences. Foreign securitisations are subject to a 0.5% stamp duty if issued in the bank�s name and entered on its balance sheet.

Private placement of notes

Structured finance

Turkey 63


Successive governments have tried to encourage the build-operate-transfer (BOT) and build-operate-own (BOO) models for state infrastructure projects. In November 2001, however, the Treasury reduced its guarantees for power projects, implying that the private-sector would gain greater autonomy and carry a higher level of risk. The projects concerned are new plants being built under BOT contracts, and existing plants and distribution networks sold off via a transfer of operational rights.

The International Monetary Fund and the World Bank backed the change. It marks a new phase in the government�s privatisation programme and aims to reduce the burden on the Treasury. The reduction in guarantees reflected a major overhaul of Turkey�s earlier energy policy, under which the country wanted to attract private investors, but only if the plants and infrastructure remained in state hands.

The parliament in August 1999 passed amendments to Article 125 of the Constitution to allow for international arbitration in disagreements related to public services involving foreign entities (Law 4446, published in Official Gazette 23787, of August 15th). The highest court to which domestic companies may apply in contractual disputes with the state remains the Council of State.

More complicated financial arrangements, such as non-recourse infrastructure loans or bonds, have not been attempted in Turkey. They have been precluded by the country�s traditionally highly volatile macroeconomic conditions and the weak development of long-term finance.

Trade financing and insurance

Since the early 1980s the government has aimed to encourage trade on a free-currency basis and to scale down its involvement through bilateral, government-to-government trade deals and Central Bank of Turkey clearing arrangements. In pursuit of this goal, and partly to compensate exporters for the phasing out of export-tax rebate incentives, the government created the Turkish Export Credit Bank (Teximbank) from the former State Investment Bank in 1987. The institution�s services have gradually expanded in both volume and type.

The Turkish Export Credit Bank (Teximbank) operates programmes designed to insure exports against commercial and political risks. The majority of the companies accessing the service are small, first-time entrants to what are deemed high-risk export markets, such as the countries of the former Soviet Union and East Asia. Under the short-term, export-credit insurance programme, US$4.3bn in exports was covered by Teximbank in 2006, up from US$4.2bn in 2005 and US$3.6bn in 2004. In 2006, 35% of the exports covered by the short-term insurance programme were in the textiles sector, followed by machinery, electrical appliances and metal products with 26%, non-metal mineral products with 12% and other sectors with 27%. In 1999 a total of US$19m worth of exports was covered under Teximbank�s medium- and long-term insurance programmes. No exports were covered under these programmes in the period 2000�06.

Infrastructure financing

Overview

Export-insurance programmes

64 Turkey


To apply for coverage, firms can approach Teximbank directly. All goods and services of Turkish origin�goods with more than 60% Turkish content and projects in which 60% of the work is undertaken by Turkish contractors�are eligible for export insurance and guarantee programmes.

Five main programmes are available:

Short-term export-credit insurance. Under this programme, all shipments made by an exporter within a given year, with payments deferred for as long as 360 days, may be insured via a single policy against political and commercial risks. Coverage is 90%. The premium rates vary according to country, payment terms and type of buyer. In most cases the rates are 0.2�2.5%, although they can rise to 4% for countries perceived as having a very high political risk. Policy proceeds are assignable for financing purposes.

Specific export-credit insurance provides insurance cover against political and commercial risks for the export of capital and semi-capital goods, with credit terms of as long as five years to maturity. Coverage can include both pre-shipment and post-shipment periods. This programme provides a form of single-buyer insurance, covering 80�95% of the contract value of exports with at least 60% domestic content; the foreign buyer is required to make a 15% cash payment. Premium rates vary according to country, payment terms and type of buyer. Policy proceeds are assignable for financing purposes.

A post-shipment political-risk insurance programme was introduced in 1996 to provide post-shipment insurance cover against political and commercial risks for the export of capital and semi-capital goods, with at least 60% domestic content and credit terms of as long as five years to maturity. The rate of coverage is 90% of the contract value of exports with at least 60% domestic content; the foreign buyer is required to make a 15% cash payment. Premium rates vary according to country, payment terms and type of buyer. Policy proceeds are assignable for financing purposes.

A specific export-credit insurance and post-shipment comprehensive-risk programme was introduced in October 1997 to provide cover against political risk for post-shipment receivables, with credit terms of up to five years, relating to the export of capital and semi-capital goods with at least 60% domestic content. The rate of coverage is 80�95% of the contract value; 15% of the contract value has to be paid in advance. Premium rates vary according to country, payment terms and type of buyer.

In 2004 Teximbank introduced an insurance programme to cover the risk of the unfair calling of bonds issued for contractors undertaking projects outside Turkey. The programme covers risks associated with bid bonds, advance payments and performance bonds and provides indemnities to the contractor for calls made under the bond by reason of events or circumstances beyond the contractor�s control.

Eight private insurance companies are authorised to provide export-credit insurance, although only seven actually provided the facility in 2006 (latest available information). The market was dominated by Garanti Sigorta, an affiliate of the commercial bank Garanti Bankasi, and Koc Allianz, which, in

Turkey 65


terms of premium production, had market shares of 70.1% and 20.3%, respectively. Volumes in the private sector remain very small, although the rate of growth is relatively fast, and premiums relatively high compared with Teximbank programmes. In 2006 private credit insurance premiums totalled US$5.8m, up from US$3.3m in 2005 and US$2m in 2004.

Most Teximbank credit programmes provide short-term credits, the terms of which depend on the type of product exported. In 2006 Teximbank provided a total of US$3.5bn in export credits, all but US$21.5m in short-term loans. In 2005 these figures were US$3.5bn and US$8m; in 2004 the figures were US$3.3bn and US$41.2m, respectively.

All industrial-good exports produced in Turkey are eligible for financing. To qualify for buyer credits, export goods must have a minimum of 60% domestic content. Foreign companies located and operating in the country are also eligible, subject to the same terms as their domestic counterparts.

In January 1996 Teximbank restructured its credit programmes to comply with the OECD consensus principles and EU regulations (93/112/EEC). Its main programmes as of December 2007 were as follows:

Pre-shipment export credit (PSEC) is a short-term facility denominated in Turkish lira and designed to meet the financing needs of export-oriented producers and exporters before shipment. Exporters do not need to be insured under Teximbank�s short-term export-credit insurance programme to qualify for PSEC. However, those who are insured under Teximbank�s programme are entitled to a 1-percentage-point reduction on the interest rate on Turkish lira PSECs and a 0.25-percentage-point reduction on the interest rate on foreign-exchange PSECs.

The credits are extended by intermediary commercial banks for a period up to 360 days. Coverage is available for as much as 100% of free on board (fob) export commitments, with a company limit of YTL6m. The intermediary banks are responsible for the default risk of the borrowers.

At end-November 2007 PSEC 120-day credits carried an annual interest rate of 14%, rising to 15% for 180-day and 360-day credits. For companies using Teximbank insurance programmes, the rates were 13% and 14%, respectively. Commercial banks are allowed a margin of as much as 2 percentage points.

Priority development-area credits is another sub-programme of the PSEC facility. Exports based in what are classed as priority development areas are eligible for PSEC at interest rates 1 percentage point lower than those prevailing for exporters based in other areas. At end-November 2007 this meant that exporters from priority development areas could access 120-day PSEC credits at an annual interest rate of 13% and 180-day and 360-day PSEC credits at an annual interest rate of 14%. For companies using Teximbank insurance programmes, the rates were 12% and 13%, respectively. Banks may charge a maximum of 1 percentage point in commissions.

Small and medium-sized enterprise (SME) export preparation credits is another sub-programme of the PSEC facility. Introduced in April 2003, it aims to

Official export-creditprogrammes

66 Turkey


support exports by SMEs. The credits are available in Turkish lira and foreign exchange to companies employing a staff of up to 200 and whose balance sheets do not exceed YTL25m during the previous financial year. The credits have a maximum maturity of 540 days. Firms are expected to provide letters of guarantee from commercial banks for at least 50% of the total volume of the credit. At end-November 2007 the SME Turkish-lira credits carried an annual interest rate of 13%. The rate remained unchanged at 13%, even if companies used the Teximbank insurance programmes. The interest rate on the foreign-exchange credits stood at LIBOR (London interbank offered rate) plus 0.75 percentage points. The rate remained unchanged even if companies used the Teximbank insurance programmes. Banks could charge a maximum of 1 percentage point in commissions on Turkish lira credits and 50 basis points in commissions for foreign-exchange credits.

The maximum tenor of pre-shipment foreign-currency export-credit loans is 540 days, and they are available for up to 100% of the fob value of export commitments. The credits are issued by Teximbank on a back-to-back basis to authorised issuing banks. At end-November 2007 the cost to the borrower for 120-day loans and 180-day loans was LIBOR plus 0.75 percentage points, rising to LIBOR plus 1 percentage point for 360-day loans and LIBOR plus 1.25 percentage points for 540-day loans. Companies using Teximbank insurance programmes were entitled to a 25-basis-point reduction in the interest rate. Intermediary banks could add a maximum of 50 basis points� commission.

Foreign trade companies� short-term export credits are available to companies that have received the status of a foreign trade capital company (FTCC) or sectoral foreign trade company (SFTC) by the Treasury Under-secretariat. The credit is issued in Turkish lira for up to 100% of the fob export commitment. The maximum repayment period is 180 days, with the interest rate set by Teximbank. At end-November 2007 the loans carried an annual interest rate of 14% for 120-day loans and 15% for 180-day loans. Companies with short-term whole-turnover export-credit insurance are entitled to a 1-percentage-point reduction in the interest rate.

Foreign trade companies� short-term foreign-currency credits are available in foreign currency to FTCCs and SFTCs for up to 100% of fob export commitments. The maximum repayment period is 360 days. The interest rate is set by Teximbank according to prevailing market conditions. At end-November 2007 the interest rate was LIBOR plus 0.75 percentage points for terms of 120 days and 180 days, and LIBOR plus 1 percentage point for terms of 360 days. Companies using Teximbank�s insurance programmes were entitled to a 25-basis-point reduction in the interest rate.

Islamic Development Bank (IDB) credits have been established by the IDB in Jeddah, Saudi Arabia, as two medium-term trade-finance schemes, with Teximbank acting as an intermediary. They are the Export Financing Scheme (EFS) and the Import Trade Financing Operation (ITFO Line). Both are available for exports to countries that are members of the Organisation of the Islamic Conference or the OECD. The buyer�s risk is borne by the IDB for EFS and by Teximbank for EFS Line. Credit is extended for periods of six months to ten years, with coverage of up to 85% of a maximum of 19.2m Islamic dinars. (The

Turkey 67


value of the Islamic dinar, which is the accounting unit of the IDB, is equivalent to one Special Drawing Right, or SDR, of the International Monetary Fund.) A fixed credit-application fee applies, and the IDB determines the annual mark-up on a case-by-case basis calculated on 12-month LIBOR plus a spread. A preliminary application is made to Teximbank, which, if it grants approval, then forwards the application to the IDB for its approval.

Export credit is negotiated directly between the exporter and its bank. Teximbank offers rediscounting for export credits extended by banks.

Exporters in normal letter-of-credit business transactions face bank charges, which vary depending on the bank, but are typically 0.15% advice commission, 0.15% negotiation commission and 0.3% payment commission (an aggregate of 0.6%). But as is the case with imports, the trend is towards cash against documents and cash against goods, on which bank transaction charges are about 0.5%. If a company has good relations with a bank, the bank may waive charges for cash against documents or cash against goods.

Tax consequences. Effective January 1st 2005, letters of credit have been exempt from stamp duty.

The main payment method for imports is cash against documents or cash against goods (paid six months after the withdrawal of the goods from customs). Letters of credit (L/Cs), though less common, are widely used. Banks usually want full Turkish lira provision, and bank transaction documents must receive customs clearance.

L/Cs are always irrevocable and mostly confirmed, though there is a movement towards unconfirmed L/Cs. For L/Cs generally, the issuing bank charges as much as 1.5%, whereas the confirming bank will charge around 1%. But larger corporations with a steady flow of business and a strong Turkish lira balance with the banks will expect much lower charges�generally an opening fee of no more than 0.5�0.75%�and sometimes no charge at all, in deference to the business they bring the banks.

As with exports, however, the trend is towards cash against documents and cash against goods, with bank charges of around 0.5% if no �avalising� is involved. Avalising charges for this kind of import financing usually will amount to around 1.5% for the first quarter and 1% in subsequent quarters of the year.

Tax consequences. Effective from January 1st 2005, letters of credit have been exempt from stamp duty.

Countertrade requires Treasury approval, since the government�s preference is for cash or credit deals. In practice, however, many firms circumvent this requirement. Where trade with Central Asia is concerned (banking facilities in that region are still rudimentary), countertrade has become critical in trade finance.

Private export-financingtechniques

Import credit

Countertrade

68 Turkey


At end-November 2007 there were four private-sector countertrade companies operating in Turkey, each charging membership fees or a commission on each transaction or both.

Leading Turkish factoring companies and some Turkish commercial banks conduct forfaiting transactions, although most business is handled by local commercial banks and offshore forfaiting centres (such as London), several of which have representative offices in Istanbul. There are no Turkish companies that concentrate exclusively on forfaiting. Most foreign-trade forfaiting is for imports rather than exports. Maturities tend to be around six months, compared with an average of three months for factoring transactions.

Key contacts

• Association of Insurance and Reinsurance Companies of Turkey (Turkiye Sigorta ve Reasurans Sirketleri Birligi), Buyukdere Plaza Kat 1-2, Buyukdere Cad No. 195, 34394, Istanbul; Tel: (90.212) 324 1950; Fax: (90.212) 325 6108; Internet: http://www.tsrsb.org.tr/tsrsb_eng/.

• Banking Regulation and Supervisory Agency (BRSA�Bankacilik Duzenleme ve Denetleme Kurumu), Ataturk Bulvari No. 191 B Blok, 06680, Kavaklidere, Ankara; Tel: (90.312) 455 6500; Fax: (90.312) 424 1733; Internet: http://www.bddk.org.tr/

• Banks Association of Turkey (Bankalar Birligi), Akmerkez, B3 Blok, Kat 13, Nispetiye Cad, Etiler, 34340, Istanbul; Tel: (90.212) 282 0973; Fax: (90.212) 282 0946; Internet: http://www.tbb.org.tr/english.

• Capital Markets Board (Sermaye Piyasasi Kurulu�SPK), Eskisehir Yolu 8. km. No. 156, 06530, Ankara; Tel: (90.312) 292 9090; Fax: (90.312) 292 9000; Internet: http://www.cmb.gov.tr.

• Central Bank of Turkey (Merkez Bankasi), Istiklal Caddesi No. 10, Ulus, 06100, Ankara; Tel: (90.312) 310 3646; Fax: (90.312) 310 9198; Internet: http://www.tcmb.gov.tr/yeni/eng.

• Factoring Association (Faktoring Dernegi), Nispetiye Caddesi No. 6 K 2, Levent Is Merkezi, 1. Levent, 34330, Istanbul; Tel: (90.212) 279 9381; Fax: (90.212) 279 9855; Internet: http://www.faktoringdernegi.org.tr (Turkish only).

• Federation of Euro-Asian Exchanges (FEAS), Tuncay Artun Caddesi, Resitpasa Mah., Emirgan, 34467, Istanbul; Tel: (90.212) 298-2160; Fax: (90.212) 298-2209; Internet: http://www.feas.org.

• Financial Leasing Association (Finansal Kiralama Dernegi), Nispetiye Caddesi No. 6 K 2, Levent Ishani, 1. Levent, 34330, Istanbul; Tel: (90.212) 284 5310; Fax: (90.212) 281 6647; Internet: http://www.fider.org.tr.

• General Directorate for Foreign Investment (GDFI�Yabanci Sermaye Genel Mudurlugu), Hazine Mustesarligi, Inonu Bulvari, Emek, 06510, Ankara; Tel: (90.312) 204 6000; Fax: (90.312) 212 8916; Internet: http://www.treasury.gov.tr/for_inv.htm.

• Iller Bank, Ataturk Bulvari No. 21, Opera, Ulus, 06053, Ankara; Tel: (90.312) 508 7000; Fax: (90.312) 508 7399; Internet: http://www.ilbank.gov.tr.

• Istanbul Stock Exchange (ISE�Istanbul Menkul Kiymetler Borsasi), Tuncay Artun Caddesi, Resitpasa Mah., Emirgan, 34467, Istanbul; Tel: (90.212) 298 2100; Fax: (90.212) 298 2500; Internet: http://www.ise.org.

• Ministry of Finance (Maliye Bakanligi), Ilkadim Caddesi, Dikmen Yolu No. 2, 06100, Ankara; Tel: (90.312) 425 1708; Fax: (90.312) 417 0515; Internet: http://www.maliye.gov.tr (Turkish only).

• Ministry of Industry and Trade (Sanayi ve Ticaret Bakanligi), Eskisehir Yolu 7km, ODTU Karsisi No. 154, Ankara; Tel: (90.312) 286 0365; Fax: (90.312) 286 5325; Internet: http://www.sanayi.gov.tr (Turkish only).

• Participation Banks Association (Turkiye Katilim Bankalari Birli�i ), Kisikli Cd. No: 24, Altunizade, Uskudar, 34662, Istanbul; Tel: (90.216) 651 94 35-37; Fax: (90.216) 651 94 39.

• Privatisation Administration (Ozellestirme Idaresi Baskanligi), Ziya Gokalp Caddesi No. 80, Kurtulus, 06600, Ankara; Tel: (90.312) 430 4560; Fax: (90.312) 435 9342; Internet: http://www.oib.gov.tr/index_eng.htm.

• Takasbank (the clearing and settlement centre), Mecidiyekoy Yolu Sok No. 286, Abide-i Hurriyet Caddesi, Sisli, 34381, Istanbul; Tel: (90.212) 315 21 87; Fax: (90.212) 315 25 26; Internet: http://www.takasbank.com.tr/eng/index.htm.

Forfaiting

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• Treasury Under-secretariat (Hazine Mustesarligi), Inonu Bulvari No. 36, Emek, 06510, Ankara; Tel: (90.312) 204 6000; Fax: (90.312) 212 8764; Internet: http://www.treasury.gov.tr.

• Turkish Derivatives Exchange (TurkDEX), Birsel Is Merkezi, Akdeniz Caddesi No. 14 Daire 601, Alsancak, 35210, Izmir. Tel: (90.232) 481 1081; Fax: (90.232) 445 6185; Internet: http://www.turkdex.org.tr/VOBPortalEng.

• Turkish Development Bank (Turkiye Kalkinma Bankasi�TKB), Izmir Caddesi No. 35, Kizilay, 06640, Ankara; Tel: (90.312) 417 9200; Fax: (90.312) 418 3967; Internet: http://www.tkb.com.tr/english.

• Turkish Export Credit Bank (Turk Eximbank�Teximbank), Milli Mudafaa Caddesi 20, Bakanliklar, 06650, Ankara; Tel: (90.312) 417 1300; Fax: (90.312) 425 7896; Internet: http://www.eximbank.gov.tr/eng/engindex,htm.

• Turkish Industrial Development Bank (Turkiye Sinai Kalkinma Bankasi�TSKB), Meclisi Mebusan Cad No. 161, Findikli, 34427, Istanbul; Tel: (90.212) 334 5050; Fax: (90.212) 243 2975; Internet: http://www.tskb.com.

turkey - wikileaks finance 2008.pdf · offshore banks 17 other financial institutions overview...

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