Estimates vary but it is certain that small- and medium-sized enterprises (SMEs) account for an enormous amount of the Turkish economy, accounting for between 95% and 99% of Turkish businesses, according to analysts.
There are around 4m businesses with between one and 10 employees registered with the Tradesmen and Artisans' Confederation. In addition, it is not uncommon to hear there are anywhere between 500,000 and 8m unregistered or informal businesses in Turkey. At the start of the decade, the National Report on Sustainable Development estimated there were over 6m people working in the country's informal sector.
These small businesses are central to Turkish employment and employment generation. According to the United Nations Development Programme (UNDP) and government statistics, non-agricultural SMEs employ about 40% of the workforce while agricultural ones such as farms employ another 27%.
"A significant portion of the population has no access to the services of formal banks," Burcu Arasli, project manager for microfinance at the UNDP's Turkey office, told OBG. "Over 50% of the population keeps its money under its pillow instead of in a bank."
On the deposit side, Turkey does not suffer from the problem that many developing countries face, where banking services are simply unavailable or too costly for the majority of the population. Instead, the biggest problem in Turkey seems to be much more one of lack of confidence in the banks, said Arasli. "After the crisis [of 2000-2001] a lot of people lost faith in the banks. They don't want to keep their money there."
Access to finance is one of the biggest problems facing small businesses and farms, according to a 2006 UNDP study carried out to gauge the level of demand for microfinance in Turkey. According to the study, 70% of SMEs have problems with this issue. Banks are loath to lend to small, potentially unregistered businesses with limited credit history or collateral. In short, these borrowers pose high risks - and the costs in administering the loans can be prohibitive. For large banks, engaging in such loans has often been deemed unprofitable. Since these banks have traditionally been largely involved in arbitrage, banking services for the small businesses have not been part of their strategy.
However, now that the arbitrage opportunities have largely come to an end as real interest rates have fallen and because the millions of small businesses are looking to invest in their businesses now that inflation has come under control, the big banks are interested. The Consultative Group to Assist the Poor, a consortium of public and private development agencies, conducted a study of several countries in Europe, including Turkey, in 2005, which estimated that compared to conventional finance, microfinance yields almost twice the return on assets. Additionally, the quality of micro lending loan portfolios compare well with conventional loans with portfolio at risk rates tending to range between 2% and 4%.
State-owned Halkbank and Ziraat Bank were traditionally the lenders of choice to small and agricultural businesses. However private sector banks like Sekerbank, established as the Sugar Beet Cooperative Bank in the 1950s, have divisions exclusively for addressing the concerns of SMEs.
In 2003, the Banking Regulation and Supervision Agency (BRSA) submitted draft legislation on micro financing to allow the licensing of deposit and non-deposit taking microfinance banks. The law would allow associations or charitable institutions to be lenders. It would alter the capital adequacy reserves for such institutions. "But the law is not in place. There are still many restrictions and ultimately, microfinance still remains in its infancy in Turkey," said Arasli.
"Mechanisms like microfinance are critical for bringing informal enterprises into the formal sector," Yuksel Gormez, an economist at the Central Bank of Turkey, told OBG. "As they become more formalised, better competition will develop and these businesses and the economy will become more productive."