Since its establishment in 2000, some local bankers have lauded the independent Banking Regulation and Supervisory Agency (BDDK) for the discipline it has instilled in the sector. Non-Performing loans (NPLs) have been whittled down and are not considered to pose a problem, while loan volumes - specifically retail loans and SME loans - have increased. The minimum capital adequacy ratio was recently increased to 12% from 8%. "The sector is very well regulated and the level of transparency and reporting mechanisms are extremely good," says Levent Celebioglu, the assistant general manager and head of financial institutions group of TEB-BNP Paribas.
While the majority of market observers praise Turkey's regulatory authority, others take a more qualified stance. "The BDDK's interventionist approach could be dangerous. Having broader and more sophisticated regulatory parameters - as for instance in Europe - is safer as it means that the entire sector will not suffer should the regulatory authority make a miscalculation or misjudgement," said a foreign bank executive. Control of interest rates on credit cards has also been a source of complaint for some in the sector, limiting returns and business expansion. This is not to deny that the regulatory authority's more accommodating approach on card interest rates has offset much sector-wide disgruntlement, resulting in a broader consensus between the regulator and regulated. Restricted consumer credit though is still raised as an issue by some insiders. "Limiting the total amount of credit available to each person protects those banks that already have customers. The emphasis rather should be on educating consumers on how to avoid debt," according to the observer. Providing safeguards against debt, regulatory fans retort, is the safest track.
Yet, the BDDK's strong mandate as a hands-on regulator should be placed in the context of Turkey's turbulent economic past, when stringent regulation of the banking sector was clearly lacking. Many observers blame the 2001 financial crisis on the lax banking safeguards of the time. While 85 banks were operating in Turkey in 2000, the number decreased to 51 by 2005 following liquidations, mergers and acquisitions.
The industry has evolved since the BDDK emerged as regulator but risk areas nonetheless remain. A recent report by international ratings agency Fitch Ratings, underlined that Turkish banks needed to closely monitor asset quality, diversify earnings and improve efficiency as the sector experiences rapid growth in loans and ever increasing competition from constituent players. In November, BDDK head Tevfik Bilgin also warned that money from deposits alone was currently not sufficient to fund the banks, with foreign borrowing filling the gap.
Foreign banks shrug at such concerns. "If you look at the banking asset to GDP ratio Turkey is approximately 85-87% in 2006, whereas for the EU 15 members it is 280% or 110% for the EU 25 members," said Celebioglu, pointing to the scope for growth in the Turkish market. Likewise, Bilgin underlined the fact that the market was potentially worth between $700bn - $800bn, as opposed to the YTL460bn ($323.03bn) registered towards the end of 2006. Turkey had previously lived in a high inflation environment with high interest rates, which forced consumers to hold back on spending. But the tide has shifted, with consumers showing greater confidence on the back of the government's economic policies.
Meanwhile, the sector as a whole will continue to benefit from the entry of foreign players. The total foreign shareholding at Turkish banks is expected to reach 18% of total paid-in capital by the end of the year, according to the 2006 Fitch report.