Interest rate and credit allocation issues in Turkey

CONFIDJVTIAL STUDIES IN DOMESTIC FiNANCE NO. 4 INTEREST RATE AND CREDIT ALLOCATION ISSUES IN TURE BY D.C. Rao Public and Private Finance Division Development Economics Department International Bank for Reconstruction and Development This study was prepared in connection with the Basic Economic Mission to Turkey in April 1973 led by Mr. EMond Asfour. The analyses, results, and judgments in this document, however, are subject to change before incorporation in the Basic Economic Report. The views expressed represent those of the author alone and not necessarily those of the International Bank for Reconstruction and Development. December 1973- TABLE OF CONTENTS C Page No. SUMMARY AND CONCLUSIONS .............*** * * iv I. FINANCIAL STRUCTURE ...........**** *******. 1 (i) Institutional Structure.........************* 1. (ii) Growth of Financial Assets......... ..***** 4 (iii) Distribution of Credit................. 5 II. INTEREST RATE POLICY ..........*************** 8 (i) Interest Rate Ceilings......................... 8 (ii) Deposit Rates ........... .***** ******* ** .. . 10 (iii) Costs of Credit .............................. 12 III. SELECTIVE CREDIT POLICIES ..............************.. 14 (i Introduction ........,.......................... 14 (ii) Specialized Institutions ...................... 14 (iii) Subsidized Credit ............................ 17 (iv) Central Bank Advances ......,................. 18 (v) Medium-Term Credit ............................ 19 IV. SECURITIES MARKET ....... .....................* .... 21 (i) Public Debt .................................... 21 (ii) Corporate Bonds ...............................' 24 (iii) Corporate Equity .4......... ................ 25 TABLES 1 Financial Assets, 1963, 1971 ............... 2 2 Private Investment and Financing ........... 3 3 Changes in Monetary Assets and Liabilities ............. 5 4 Allocation of Increase in Outstanding*Credits, 1963 to 1971 ................ ...g..... . . .... ....... 6 5 Outstanding Credits to Public Sector ................... 7 6 Additional Costs of Bank Credit ............. 12 7 Bank Loans and Deposits ................. 16 8 Domestic Public Debt, 1963 to 1972 ................ 22 9 Long-Term Government Bond Sales ................... .... 23 TABLE OF CONTENTS (Cont'd) APPENDICES 1 Maximum Lending Interest Rates 2 Maximum Interest Rates on Deposits 3 Monetary Survey, 1952-1961 4 Monetary Survey, 1962-1972 5 Consolidated Banking System Credits, 1952-1960 6 Consolidated Banking System Credits, 1961-1972 7 Composition of Deposits with Banking System, 1961-72 8 Maturity Structure of Commercial and Savings Deposits, 1963-72 9 Internal Public Debt, 1963-72 10 Long-Term Government Bonds, by Category of Purchaser 11 Corporate Bond Market 12 Insurance Premiums, 1962-71 13 Life Insurance, 1967-71 14 Insurance Companies: Distribution of Assets 15 Sectoral Distribution of Credits, 1963-71 16 Total Assets of Financial Institutions, 1962 to 1971 17 The Cost of Bank Credit 18 Resources of State Investment Bank 19 Flows of Funds Through Financial Institutions, 1963-1968 20 Components of Cost of Corporate Bond Borrowing GRAPH 1 Changes in Interest Rate on Savings Deposits SUMHARY AND CONCLUSIONS 1. Growth of financial assets: An increasing share of GNP has been channeled through Turkey's financial institutions and the share of monetary liabilities to GNP has increased from 0.20 in 1952 to 0.32 in 1972. This process has been aided by a number of factors: traditional agriculture has been declining as a share of GDP; interest rates on deposits have been increased in 1961 and 1970; and the flow of workers' remittances from abroad has accelerated to 4.8% of GDP in 1972. Since 1963, about 72% of the growth of all financial assets (including direct debt) took place in the banking system, primarily as a result of expansionary monetary policies. Over the last two decades, the supply of currency grew at a compound rate of 14.1% per year. Other monetary liabilities, especially time deposits grew faster. Time deposits grew from 5% of GNF to nearly 9% in 1972, and now amount to one-third of all monetary liabilities. 2. There has been little development of financial assets outside the banking system. The growth of development bank assets has been the result of earmarking the surplus generated by the government-managed, compulsory social insurance funds. Insurance companies have remained negligibly small. "Direct" financial assets (defined as government bonds, corporate bonds and corporate stock) have fallen from 38% to 29% of GNP from 1963 to 1971. 3. The principal objectives of policies relating to Turkey's fi- nancial system should be to increase the proportion of savings that are held in the form of financial assets and to improve the mechanism for the allocation of credit of priority investment sectors. For both these objec- tives, an effective set of policies must recognize the dominant role of banks, with measures to improve the securities market playing a secondary (though not unimportant) role. 4. The Third Plan envisages a total fixed investment expenditure of TL 281 billion during 1973-77 at 1972 prices. If the pattern of investment. financing were to remain the same as in the last decade, this would require that the assets of banks (including development banks) should expand at approximately 18% per year at constant prices. In the past decade, the, assets of the banking system have grown at 7.5% per year at constant prices. The forecast deficits of the social funds make it extremely unlikely that there will be a major expansion in development bank assets. Any attempt to accelerate the rate of expansion of banking system assets using an ex- pansionary monetary policy will be self-defeating. The resulting inflation will erode the real value of whatever nominal increase in assets is achieved. 5. This highlights the major transformation in financing practices that will be necessary if investment targets are to be met without generat- ing excessive inflation, and if the economy's savings are to be utilized to best advantage in achieving the desired pattern of investment. 6. Interest rates: Strict control over the entire structure of in- terest rates has been an important facet of Turkey's monetary policy for many years. In general, ceilings on interest rates have been set below market equilibrium rates, in the belief that this helps to contain in- flationary pressures. Ceilings on interest rates on loans made by banks are easily circumvented by additional charges and compensating deposits. I/ . Together with taxes on financial transactions, these charges raise the cost of credit from 12% to about 18-20% per annum which is probably close to an equilibrium rate of interest. But there is no similar attempt to raise the earnings ol depositors. The interest ceilings on deposits are adhered to and the use of prizes to attract deposits is strictly limited. 7. The additional earnings arising out of the high spread between the cost of deposits and the earnings on loans have been absorbed primarily by a very rapid expansion of branches, almost exclusively in towns which already had banks and mostly in medium and large cities. This suggests that branch expansion has been socially wasteful and a careful analysis of this question should be undertaken to form a mature judgment and guide policy for the future. 8. Higher interest rates would be more effective in attracting deposits than branch expansion. Over the last two decades there has been a mild increase in interest rates paid on time deposits relative to other deposits, and there has been a significant shift in the composition of deposits and the ratio of all deposits to currency. A bolder use of interest rate policy is needed to enhance the growth of time deposits; instead, the maturity structure of time deposit rates was altered in 1973, making them less attractive to depositors. 9. Interest rate policies are also important in the allocation of credit and the development of the bond market, which are dealt with below. 10. Allocation of credit: Government policy influences the allocation of credit through a complex system of differential interest rates, subsidies and institutional barriers to movement of funds. The policy of specifying lower ceilings on interest rates for priority sectors than for other credits discourages private commercial banks from making such credits. Consequently, priority sectors have received loans primarily from specialized institutions which have privileged access to official sources of funds - such as Central Bank advances and rediscounts, external loans, government subsidy, offical deposits and social security premia. Because of taxes and other statutory barriers to movement of funds between these financial institutions, the Central Bank tends to bear a heavy burden of providing credit to priority sectors. In part, this burden is borne indirectly by lending to the govern- ment. Placing the burden on the Central Bank has the undesirable effect of making monetary expansion a necessary by-product of expanding credits to priority sectors. The task of aggregate demand management becomes more difficult. 1/ A device not available to development banks making long-term loans. 11. This problem will be more severe in the future than it has been in the past as the surpluses derived from the expanding coverage of the compulsory social security system disappear. With growing scarcity of public sector resources, specialized institutions must find other sources of funds and all banks (not only the specialized institutions) must be encouraged to lend to priority sectors. 12. An improved mechanism for allocating credits will involve a number of measures. First, remove interest ceilings on priority credits. Banks will then have a profit incentive to make loans to these sectors, and specialized institutions will improve their ability to raise more resources from the public and expand their operations. No doubt there will be an increase in the cost of credit to present priority borrowers. But alternative incentive schemes (such as tax rebates) are probably more effective in encouraging priority investments and less disruptive than artificially low ceilings on interest rates. If it is considered essential that the cost of credit be kept low, this should be achieved by explicit government subsidies to the borrower or exemptions from the transactions tax and stamp duties. 13. secondly, banks could be provided additional incentives on a selec- tive basis, if necessary, to increase their lending to priority sectors. These should be designed to alter the relative profitability of different types of lending (without necessarily affecting the level of overall bank profits), using differential reserve requirements and subsidy schemes. The essential point is to increase the supply of priority credits and not only the demand, as.present measures tend to do. Recent measures regarding medium- term credits by commercial banks illustrate how these policies can be effec- tive in the Turkish context. 14. Thirdly, abolish the tax on financial transactions between financial institutions so that funds circulate more freely. The revenue impact of this exemption will be rather small but the impact on the financial system is likely to be significant. Specialized institutions would then be able to supplement their resources from other financial institutions - either by borrowing (e.g., from commercial banks) or by the sale of bonds (e.g., to insurance companies and private pension funds). 15. These measures will improve the availability of credit to those making priority investments and encourage investment in these sectors. Present allocative mechanisms tend to provide a limited amount of credit at lower cost, the benefit of which is enjoyed only by those who actually re-. ceive the loans. 16. Securities market: The securities market in Turkey is almost non- existent, although the volume of outstanding securities is quite high. The bulk of non-monetary financial liabilities is issued by the public sector and consists largely of bonds sold with the help of statutory provisions of one sort or another. Next in importance is the share capital of private corporations which is not usually marketed either, because most firms are -iv closely held. The volume of corporate bond issues is very small, financing no more than 5% of private manufacturing investment. Most private investment, therefore, is financed out of the entrepreneur's own resources or by short- term borrowing from. commercial banks which is rolled over on maturity. 17. Although there has been draft legislation for many years relating to encouragement of the capital market, there is yet no law. Nor should immediate results be anticipated if the present bill is adopted. The main recommendation of the existing bill is the establishment of a Capital Market Control Commission and it will inevitably be some years before these measures lead to greater confidence among the small investors or greater supply of good equity securities. 18. However, there is need for more enlightened government policy in relation to the bond market. The interest ceiling of 15% imposed on private corporate bonds has been unrealistically low and has impeded the growth of a promising instrument of long-term corporate finance. Regulations requir- ing transactions to be recorded at the official stock exchange (thereby incurring high commission expenses) have prevented the growth of a secondary market in bonds among financial institutions. A healthy secondary market is essential for promoting demand for financial instruments and this has been lacking for corporate bonds. 19. The principal rationale for the 15% interest ceiling on corporate bonds appears to be to keep them in line with government bonds, which are issued at a tax free 9%. The ambitious public investment target in the Third Plan, the certain over-estimation of the sources of public saving and the growth of private liquidity resulting from workers' remittances from abroad, all point to the necessity and feasibility of more long-term government borrowing from the public. The sale of long-term government bonds to individuals did in fact rise very promisingly in 1972, but was still only 16% of total issues. Public institutions purchased twice that amount and banks three times. The purchase of government bonds by banks apparently involves a considerable amount of moral suasion, which forms a poor basis for future growth of the bond market. An upward revision of the interest rate on government bonds and a removal of the ceiling on corporate bond interest rates would significantly help the financing of long-term investment in both the public and private industrial sectors. I. THE FINANCIAL STRUCTURE (i) Institutional Structure 1. The financial system of Turkey consists almost exclusively of deposit banks and specialized development banks, whose combined assets amounted to 73% of all financial assets in the economy (Table 1). The only other financial institutions are insurance companies whose total assets are less than 1% of GNP. Direct financial debt of the non-financial sectors is rather small and not rising as fast as GNP; it consists of long- term government bonds which are sold primarily to financial institutions and corporate stock which is closely held. Private corporations have issued . bonds publicly since 1967 but the total volume is still very small. 2. There is a considerable amount of specialization among the principal financial institutions in the scope of their lending and sometimes also in their sources of funds. The State Investment Bank (SIB) lends exclusively to state economic enterprises and draws its resources almost exclusively from compulsory social insurance funds. There are two other development banks TSKB (Turkiye Sinai Kalkinma Bankasi) and SYKB (Sinai Yatirim Kredi Bankasi) which provide medium- and long-term credit to private industry. Among the deposit banks there is a group of government owned "special law" banks which specialize in lending to agriculture, real estate, local administrations, small artisans, religious institutions, etc. 1/ 3. The physical facilities of the banking system have grown rapidly. The number of bank branches has increased from 1,916 in 1961 to 3,524 in 1972 (an average of a branch for every 10,300 people). The number of deposit accounts has growth from 5 million in 1963 to 13 million in 1971. As pointed out later, there is probably some waste in such development. 4. The slow growth of the securities markets is reflected in the pattern of financing of private investment. Of private sector investment averaging TL 11.3 billion per year from 1965 to 1971 (including changes in stocks), about 38% has been financed by the banking system and only 1% by the sale of bonds (Table 2). The balance, 61%, has been financed by the resources of the investors, including the issue of shares. 1/ There are 11 special law banks of a total of 41 banks. The major special law .banks are the Agriculture Bank, Real Estate Bank, Provincial Bank, Peoples' Bank, Sumerbank, Etibank and Maritime Bank. The last three institutions also undertake many non-banking activities. -2- Table 1: FINANCIAL ASSETS, 1963, 1971 (TL billion and %) 1963 1971 TL 7 TL Financial Institutions 45.4 64.9 148.8 73.5 Central Bank n .7 13.T -53.T T9" Commercial Banks 25.3 36.1 91.9 45.4 - (Special Law) (16.9) (24.1) (54.8) (27.1) - (Other) (8.4) (12.0) (37.1) (18.3) Development Banks 8.7 12.4 16,4 8.1 Insurance Companies 0.7 1.0 1.7 0.8 Direct Debt 2 24.6 35.1 53.6 26.5 overent Domestic Deb 10.4 7-T 7 " Private Corporate Bond 3 - - 0.7 0.3 Corporate StockLL 14.2 20.2 29.0 14.3 TOTAL 70.0 100.0 202.4 100.0 l Total assets of these institutions. See Appendix Table 17. /2 From Appendix Table 9, excluding State Investment Bank Bonds. Z3 An estimate of the volume of bonds outstanding, based on new issues (Appendix Table 11) and asaming that all bonds are issued with 7- year maturity and 2-year grace before commencement of repayment. /4 The only available data are the net increases in the nominal capital of registered companies (published by the State Institute of Statistics) and a rough estimate of aggregate outstanding paid- in value of stock, by Dr. Betty laser. -3- Table 2: PRIVATE INVESTMENT AND FINANCING ]l (TL million; annual average for period 1965-1971) TL Z Fixed Investment 9,855 87.2 Increase in Stocks 1,442 12.8 TOTAL 11,297 100.0 Banking System 4,321 38.2 Bonds 114 1.0 Self-finance 6,862 60.8 /1 Estimates made by the State Planning Organization. 5. The source of finance for various sectors differs greatly from the average. Bank credit financed 34% of total investment in industry and mining, as much as 63% of investment in agriculture but only 9% of investment in hous- ing and construction. This wide variation reflects the institutional and legal situation regarding the supply of credit to different sectors rather than the profitability of such credits to banks (see below). Thus, agricul- tural credit is given very high priority in the use of Central Bank resources and is the exclusive concern of the largest commercial bank in Turkey (Agri- cultural Bank). On the other hand, only one bank is legally authorized to lend against immovable property. Housing construction is financed only by this one bank (Real Estate Bank) and by loans made by the social security institutions to their members, although the construction industry may be the ultimate recipient of bank credits to other sectors. 6. The above specialization illustrates a general practice of forcing credit flows through rather rigid channels, discouraging movement between the channels. The extent of this "compartmentalization" is difficult to quantify but is strikingly high. Transactions between financial organizations are relatively small / and most of these flows represent statutory purchases of SIB bonds by social insurance agencies and flows be%-ween the Central Bank and the commercial banks reflecting legal reserve requirements and Central Bank advances. In their dealings with non-financial sectors, the financial institutions are highly specialized. The Central Bank finances the government and a few SEEs; social insurance institutions collect premia from households 1/ A study of the flow of funds through financial institutions during 1963-68, by Professor Ertuna, indicates that four classes of institutions (Central Bank, banks, Social insurance agencies and SIB) received and distributed a total of TL 56 billion, of which TL 43 billion went to non-financial sectors. Thus, flows between these classes of financial institutions were only TL 13 billion, or only 31% of flows out of the financial sector (Appendix Table 19). -4- and firms to finance the SIB and make some investments of their own; the SIB *receives funds from the government and social insurance to finance SEEB; the "special law" banks have limited sources of funds and lend to specified categories of borrowers. Only the other commercial banks appear to deal with a wide range of non-financial sectors. Their lending, too, is subject to government influence through differential interest rate ceilings and selective credit policies. (ii) Growth of Financial Assets 7. By conventional measures, Turkey's financial sector is well-devel- oped in relation to the level of aggregate economic activity. Assets of financial institutions have grown at 7.6% per year from 1963 to 1971, at constant prices, whereas real GNP has grown at 6.8% and real investment at 8.6%. An increasing proportion of the nation's expenditures has therefore, been channelled through financial institutions. 8. Money and quasi-money (i.e., currency in circulation and total deposits) has grown from 20% of GNP in 1952 to 32.6% in 1972 (Appendix Tables 3 and 4), which is high relative to most developing countries. The process of monetization has undoubtedly been helped by the rapid decrease in the share of agriculture in GNP (from 43% in 1952 to 25% in 1972) as well as the spread of modern agriculture. Another major influence has been the increase in interest rates paid to depositors, especially on longer maturities and the scarcity of alternative financial assets (which can serve as stores of value and still retain some liquidity) in an inflationary situation. 9. Monetary liabilities of the banking system have grown at an average annual rate of 18% over the past two decades, faster than the supply of currency which has grown at 14% per year. The primary determinants of the supply of currency have been the inability of the public sector to mobilize adequate savings for growing public investments and, since 1970, the dramatic improvement in the balance of payments. The relatively rapid growth of deposits, especially time deposits, is the result of several factors in- fluencing the financialization of national savings noted above, including the remittances of emigrant workers in Europe and the higher interest rates on deposits.1/ 10. The proximate determinants of the supply of money during most of the past two decades have been Central Bank credit to the Treasury and for agriculture, both of which are determined by government policy. Central Bank credit to state economic enterprises was a major influence on the growth of money supply until 1960, but has been severely restricted since 1/ Developments in 1973 may affect the future growth of deposits adversely. Deposit interest rates have been reduced in the 6- to 24-month maturity range by 1 percentage point and the rate of inflation has been high. More recent international developments affecting Turkey's oil imports and worker remittances from abroad will have an adverse impact on .foreign asset accumlation, and hence on monetary growth. -.5 - then. Since 1970, the growth of net foreign assets has also been a major factor behind the growth of money supply but has so far been less amenable to policy control. Net foreign assets of the banking system showed no growth from 1952 to 1970 but have grown very rapidly since (from $11 million at end 1970 to $556 million at end 1972) due mainly to the accelerated inflow of workers' remittances and improved exports. While these inflows have very obvious economic benefits, it .should also be recognized that they contribute significantly to infiationary pressures in the economy. 11. Central Bank advances to the Treasury are influenced by the size of the budget deficit and the extent to which the government is able to borrow from other sources. Short-term advances to the Treasury have increased rapidly in the last decade, primarily as a result of the expanded public investment program. They are legally limited, however, to 15% of the general budget expenditure. Central Bank credit to agricultural agencies is determined primarily by the needs created by price support policies and harvest sur- pluses. In essence, high purchase prices and inadequate margins to meet operating costs were responsible for additional borrowing needs of the Soil Products Office and the Agricultural Sales Cooperatives which administer the price support program. Table 3: CHANGES IN MONETARY ASSETS AND LIABILITIES (TL billion and percent) 1952 - 1962 1962 - 1967 1967 - 1972 TL % TL % TL % Money 8.55 81 11.71 81 30.39 67 (of which demand deposits) (5.17) (49) (7.53) (52) (23.31) (52) Quasi-money 2.02 19 2.74 19 14.83 33 TOTAL 10.57 100 14.45 100 45.22 100 Net Claims on Public Sector 6.45 61 5.97 41 9.64 21 Claims on Private Sector 7.23 68 11.69 81 30.90 68 Net Foreign Assets 0.38 4 -0.36 -2 7.81 17 Other -3.49 -33 -2.85 -20 -3.13 -6 Source: Appendix Tables 3 and 4. (iii) Distribution of Credit 12. The trend in the allocation of credits to both private and public sector reflects the emphasis on industrialization in the planned development strategy of the country and the major role of the public sector in fixed in- vestment. Table 4 presents the sectoral allocation of the increase in out- standing credits from 1963 to 1971. Industry and mining have taken 34% of - 6- the expansion in credits to the private sector, raising their share of out- standing credits from 1.7% in 1963 to 29% in 1971. This increase has been achieved primarily by restraining the growth of credits for housing and construction. Credits to industry and mining have taken the lion's share of the increase in credits to the public sector. Table 4: ALLOCATION OF INCREASE IN OUTSTANDING CREDITS, /1 1963 to 1971 (TL million and % shares) Sector Private Public Total TL I % TL % TL % Industry, Mining 9,696 34 15,274 57 24,970 45 Agriculture 6,954 24 2,732 10 9,686 18 Small Artisans, etc. 1,065 3 - - 1,065 2 Housing, Construction 2,818 10 - - 2,818 5 . External Trade, Tourism 2,531 9 433 2 2,964 5 Financial 176 1 7,023/2 26 7,199/2 13 Distribution, Services 5,418 19 1,476 5 6,894 12 TCTAL 28,658 100 26,938 100 55,596 100 /1 Credits mad- by the Banking System and the State Investment Bank. /2 Including credit to State economic enterprises, primarily for investment in industry and mining. Source: Appendix Table 15. 13. A comparison of the distribution of the increase in credit with the distribution of fixed investment expenditures among the principal investmerit sectors during 1963-71 shows that agricultural credit to the private sector (24% of total credit to the private sector) and industrial credits to the public sector (57% of public) absorbed a considerably higher proportion of the expansion of credit than their shares in total fixed investment (11% and 32% respectively) perhaps due to their heavier demand for working capital. The sector in which credit lagged was the private housing and construction sector (10% vs. 41%). -7- 14. In aggregate, the public sector received 48% of the increase in outstanding credits from 1963 to 1971, its share of these credits increasing from 26% to 44%. During this period, the public sector undertook 56% of total fixed investments. The most striking increase in public sector credit between 1963 and 1971 was in industry and mining (from 19% to 59% of the total), as a result of SIB credits which accounted for 48% of total credits to the public sector in 1971. The only sector in which the public share has declined is distribution and services, but even in this sector credit to the public sector has been growing at 2.8% per year at constant prices from 1963 to 1971 (Table 5). Table 5: OUTSTANDING CREDITS TO PUBLIC SECTOR /1 (TL million and % share) 1963 1971 % share % share of credits of credits Sector TL to sector TL to sector Industry, Mining 400 18.7 15,674 57.8 Agriculture 977 28.3 3,709 28.3 External Trade, Tourism 104 6.2 537 11.6 Financial 815 87.2 7,838 96.4 Distribution Services 1,221 43.5 2,697 27.8 TOTAL 3,517 25.6 30,455 43.9 /1 Credits made by the banking system and SIB. Source: Appendix Table 15. -8- II. INTEREST RATE POLICY (i) Interest Rate Ceilings 15. Strict control over the structure of interest rates in Turkey dates back to 1938 and has been one of the most important instruments of monetary policy in the last decade. Official pronouncements regarding the desirable structure and the degree of control to be exercised have varied greatly and the Third Development Plan would like to see interest rates that reflect the scarcity of capital. But in practice, the policy has been to keep interest rates below the market equilibrium rate, and there was in fact a reduction in interest rates in early 1973. 1/ 16. A variety of motivations can be adduced to explain the policy of low interest rates in Turkey. The dominant motivation appears to be the desire to reduce the cost of production in industry, thereby increasing international competitiveness and combating domestic inflationary pressure. It is highly unlikely that the policy has these intended effects. First, with the possible exception of the construction industry, interest costs are only a small part of the cost of production and probably make no signifi- cant difference to export potential. 2/ Secondly, once-for-all reductions in interest rates as in 1972 cannot have much effect on inflationary pressure, which is a continuing process. Finally, it is generally agreed that banks are able to evade the interest ceilings by charging a variety of commissions (which are nominally regulated as well) and by requiring compensating deposits (which is not legally permitted); consequently, ceilings on interest rates probably do not reduce the actual cost of credit to borrowers. Conversely, interest ceilings have some undesirable consequences on the mode of allocation of credit and on equity between savers and investors which will be discussed further below. 17. The ceilings on interest rates extend over all categories of credits, rediscounts and deposits, and in practice, actual interest rates are set at the prescribed ceilings. There have been only two revisions in the structure of legal interest rate ceilings since 1961 (Appendix Tables 1 and 2). In 1961 I/ In addition to keeping the general level of interest rates low, the structure of interest rates is also changed to favor borrowers in priority sectors. Only the former will be discussed here. The latter will be discussed in the following sections along with other selective credit polici.s. 2/ A study of 245 firms in modern, industrial sectors financed by TSKB shows that, in 1971, interest payments, inclusive of taxes and commissions, average 7% of the cost of production. The structure of private industry in Turkey suggests that investment goods are not very long-lived and, therefore, interest cost is unlikely to be an important element in the investment decision. 9- the ceilings on lending rates ranged from 7.0% to 10.5% and on deposit rates from 2.0% to 6.5%. In 1970, there was an upward adjustment of 1.0%.to 1.5% in most rates and the maximum time deposit rate was increased by 3%. In 1973, there was a partial return to the 1961 structure of interest rates. Short- term lending rates were reduced by 1.0% to 1.5%. Medium-term lending rates remained at the 1970 ceiling of 12%. Interest rates on demand deposits were reduced by 0.5% to 1.0% and the maturity structure of time deposit rates was altered, making them less attractive to depositors (Graph 1 and Appendix Table 2). Since 1970, a ceiling of 15% has been decreed for private corporate bonds; and in 1973, interest rates on inter-bank deposits were allowed to find their own level. Graph 1: Chan,es in Tntercst. Rate on RLvinzs Depobits r 8 . F: XLE 7( 2 - 6 2 18 21t Y aturity (m";onthls) Source: Appendix Table 2.. - 10 - (ii) Deposit Rates 18. The ceilings on deposit interest rates are a consequence of the ceilings placed on lending rates on the one hand and desire of banks to protect their profitability. Interest on deposits and other banking ques- tions are discussed by a trade association which is endorsed by the govern- ment (The Banks' Association of Turkey). Its membership is compulsory for all banks, its b'ard zeetings are presided over by the Governor of the Cen- tral Bank and its resolutions have the force of law. 1/ While the payments on deposits have been strictly limited, bank charges and commissions (see details below) increase earnings from loans. From 1963 to 1971, the average payments on outstanding deposits (inclusive of interest, commissions and "premiums") were slightly below 4% for national commercial banks other than special law banks whereas income from lending operations (inclusive of interest, commissions and charges for banking services) was about 10% of outstanding deposits and about 15% of outstanding loans. 2/ Income from investments was an additional 0.5% of deposit volume. The spread available for expenses and profits of banks is, therefore, about 7% on the volume of deposits (except in 1971 when the ratio of credits to deposits was excep- tionally low). 19. This high spread has made it possible for the banks to compete strongly for deposits by somewhat excessive advertising and expansion in the number of branches. The number of branches increased by 67% over the five years from 1966 to 1971. The private, national banks expanded by 94% while branches of special law banks mostly by the Agriculture Bank and the People's Bank grew 43% during this period. Judgments on the net economic benefits of branch expansion (authorized by the Central Bank) must obviocsly be preceded by careful, detailed study. However, the available evidence suggests that the branch expansion by private banks has been wasteful. With price competition among banks (through interest and premiums) being severaly circumscribed by regulation, the justification for branch expansion has to be a significant improvement of public access to banks and better mobilization of savings. In fact, the 1,369 new branches opened between 1966 and 1971 brought banks to only 23 new towns. In 19 of these 23 towns, the pioneers were apecial law banks rather than private banks. The propor- tion of bank branches in the three main metropolitan provinces (Istanbul, 1/ The Association also regulates the use of lotteries and other means to attract deposits. Prizes offered are now limited to a maximum of 0.5% of outstanding deposits plus a fixed sum determined by the Central Bank. 2/ The calculations are based on balance sheets and profit and loss state- ments published by the Banks' Association of Turkey. Outstanding deposits are defined as the sum of official, commercial, bank and savings deposits. Special law banks are excluded because they rely on non-deposit sources for a significant part of their funds. - 11- Ankara and Izmir) increased from 33% to 35%. Thus the 874 new branches of private national banks were established almost exclusively in towns which already had banks and mostly in medium and large cities. 1/ 20. Because o' the ceilings on interest rates and the price inflation, depositors have earned a negative real rate of return on both sight and time deposits throughout the last decade; in this situation the convenience yield of branch expansion has probably been small. It is difficult to quantify the effect of the low rate of return, or of the expansion of bank branches, on deposit accumulation because there are many other factors influencing it at the same time. In particular, government monetary policy has allowed a rapid increase in the supply of currency and hence in deposits; interest ceilings and other factors have discouraged the development of a capital market that could have provided other investment opportunities to private savers; improvement in the balance of payments has resulted in a reduction of blocked import deposits with the Central Bank, part of which must have been transferred to commercial banks; part of workers' remittances that surged after devaluation has been saved in the form of deposits. 21. The ratio of time deposits to total monetary liabilities of the banking system was less than 27% for a number of years, but increased sharply to 30% at the end of 1970 and 33% at the end of 1971. The various factors mentioned in the previous paragraph would also affect this ratio but the increase in the interest rate from 6.5% to 9% probably had a significant effect as ell, indicating that deposits would respond to the stimulus of higher interest rates. 22. The reasons advanced in favor of deposit rate ceilings are the need to avoid "excessive" competition among banks, reduce bankruptcies and retain public faith in the banking system. However, these objectives can be achieved more effectively by supervision of bank liquidity (which is already being done by the Central Bank) and the introduction of a deposit insurance scheme. Such measures would permit a general increase in interest rates paid to depositors, would probably result in greater deposit mobilization and raise the capacity of banks to extend medium-term credit. 23. A serious objection to a policy of low deposit interest rates can be advanced on grounds of equity. Two-thirds of the deposits outstanding at the end of 1971 were held by individuals and two-thirds of the individual , accounts had outstanding balances of less than TL 1,000 at the end of 1971. Even allowing for a substantial duplication of accounts, at least half of the 1/ Branch expansion has been accompanied by expansion of the number of deposit accounts but this is a misleading indicator of the number of depositors. Up to TL 500 of interest income from each deposit account is exempt from income tax provided the accounts are in different branches. This encourages the multiplication of accounts. There were 12.6 million savings accounts at the end of 1971 when the total population in the 15-64 age group was only 20 million. - 12 - depositors can be classified as small savers to whom bank deposits are the only available financial asset (other than currency). A policy of low deposit interest rates discriminates unfairly against this class of saver. (iii) Costs of Credit 24. Interest ceilings on bank lending being unrealistically low, banks are able to raise the cost of credit to their customers by the imposition of various fees and commissions, and passing on to the borrower the burden of taxes. There are detailed regulations regarding the taxes and commissions that a bank can (or ought to) charge on each type of transaction (Appendix Table 17). In addition, the bank can also charge communication costs for inter-town transactions and fees for insurance. (Some banks in Turkey also have associated insurance companies.) Further, some borrowers may be asked to maintain compensating deposits, thereby increasing the cost of net bank credit to them. Banks tend to negotiate a package of financing with their customers that would assure them a satisfactory composite yield. Regulations on specific transactions, therefore, are easily avoided. The broad cate- gories of the additional costs of bank credit are shown in Table 6 below. The net effect of these charges is to increase the cost of credit by 7 to 8 percentage points above the nominal interest rate. Table 6: ADDITIONAL COSTS OF BANK CREDIT /1 Commission: 1.5% to 3.0% of value of credit. Stamp tax: 0.5%, incurred twice if a letter of credit is used. Communication costs: 0.5% Insurance: 1.0%, if credit is against merchandise. Transactions tax: 25% of interest and all other charges except stamp tax and insrance. /1 Costs other than interest charges which are paid by the borrower. The figures represent orders of magnitude. 25. On the basis of official charges alone, the cost of short-term credit to prime borrowers is increased from 10.5% to a maximum of 17.7% and of medium-term credit from 12% to a maximum of 19.9%. In practice, the cost of short-term credit can vary from 16% to 22%, and there is wide varia- tion in the cost of medium-term credit as well. Corporate bonds, which are subject to an interest ceiling of 15% usually cost about 20% because of the need for bank guarantees of most issues. Trade credit and consumer credit 13 - are not offered by banks and their interest rates are not regulated. Their costs are estimated to be in the ranges of 28-36% and 36-56% respectively. 1/ 26. On this evidence, it appears that ceilings on interest rates have not achieved their major purpose: to reduce the cost of credit to investors and other borrowers. Interest ceilings, by leading commercial banks to rely on commissions and fees for a major part of their income, have at the same time introduced serious distortions in the supply of credit for fixed invest- ment. With interest and commissions fixed, banks have no incentive in financ- ing new investments which are good but involve risks, leading them to prefer established borrowers to new entrepreneurs, and to prefer credits against discounts and short-term credits rather than medium-term investment credits. 1/ Of course, the actual prevailing cost varies in time and according to purpose, client and general supply-demand conditions. Only fragmentary evidence is available on what the equilibrium rate really is. When the corporate bond market flourished briefly in early 1970 in Istanbul, interest rates around 15% per annum were prevalent; compulsory savings bonds were traded in a secondary market until 1967 at a discount which implied interest rates around 30%. The interest rate implied by transactions in the secondary bond market in Istanbul in mid-1972 was about 16.5% and the coupons of compul.tory savings bonds were also traded at similar discounts. But these markets are so thin that one hesitates to draw firm conclusions on this basis. - 14 - III. SELECTIVE CREDIT POLICIES (i) Introduction 27. The moneiary authorities in Turkey have taken a wide variety of measures attempting to discriminate in favor of one or another sector in the allocation of credit. The objective of these measures is to improve the role of the financial sector in economic and social development by increasing the availability or reducing the cost of credit to specified priority sectors. Broadly, the selective credit policies that have been adopted have favored the financing of public investment, agriculture, and medium-term lending to industry with some emphasis on export-oriented activities. It can be assumed that, by and large, credit was used for the acknowledged purpose, with no more than small leakages to other activities. 28.- A wide range of instruments has been used in pursuit of these policy goals: specialized institutions with privileged access to specific sources of funds, differential interest rate ceilings, tax exemptions and subsidies, access to the Central Bank, quotas and prohibitions on commercial bank lending, and differential reserve requirements. (ii) Specialized Institutions 29. Specialized financial institutions have been established as a result of government policy and tend to be heavily dependent on financial support from the government. They are subject to interest rate ceilings which inhibit these institutions from raising resources by issuing non- deposit obligations. Further, the banking transaction tax is applied to transactions between various financial institutions, thereby discouraging such flows of funds. 30. The private development banks (TSKB and SYKE) lend at 127, whereas they would have to pay at least 15% to raise long-term resources from the public or from other financial institutions. Consequently, they have to rely on the supply,of funds as a result of negotiated arrangements rather than commercial borrowing. The only private source of funds that TSKB has is its equity (11% of its capital in 1971). Domestic debt, 21% of its capital, is entirely supplied by the government and the rest is foreign ex- change borrowing from official lending agencies, guaranteed by the Turkish government. SYKB (Industrial Investment and Credit Bank) is entirely in- dependent of government finances and gets its funds primarily from six large commercial banks which have agreed to transfer to SYKB 5% of the in- crease in their deposits each year. But, as a result of interest ceilings and a tax on financial transactions, SYKB can pay no more than 9% interest on this debt - far less than the banks can earn on other lending. Therefore, the arrangement between SYKB and the banks is a rather precarious one. Futher, SYKB has had only limited access to foreign exchange resources and consequently has a rather high ratio of working capital credits in its lend- ing portfolio. - 15 - 31. The State Investment Bank lends to SEE's at 9.5-10.5%, which is even cheaper than the cheap credits offered by private development banks, and is correspondingly more reliant on tied sources of finance. The State Investment Bank gets all its resources either by direct government subsidy or by the sale of bonds to the government-managed social security institu- tions and uses thez to finance the investments of state economic enterprises. The surplus of social security institutions is rapidly vanishing and will soon turn to a deficit. 1/ Unless it is able to sell its bonds to private * .institutions and individuals or borrow from abroad, the viability of the SIB will depend on the resources generated by the expansion of the coverage of social insurance to self-employed persons and/or on direct subsidization by the Treasury. 32. The Agricultural Bank has the largest deposits of any bank in Turkey. Official deposits accounted for 39% of one bank's total deposits at end of 1971. It also has privileged access to the Central Bank, which finances a large part of its credit to agricultural sales cooperatives and agricultural credit cooperatives. The latter is another form of specialized institution making credits to agriculture, but in fact is almost wholly dependent on the Agricultural Bank. The proportion of credit cooperative loans not financed from the Agricultural Bank has dwindled from 26% to 11% in recent years. 33. The special law banks depend primarily on government rather than on deposit mobilization for their financing. The very striking difference in this regard between special law and other national banks is shown in Table 7. Non-official deposits, the only significant private source of funds to special law banks, accounted for only 53% of loans made by special law banks and 143% of loans made by other national banks. Iller Bank (which specializes in financing local administrations) obtained only 1% of its loan volume as non-official deposits at the end of 1972. With the exception of the Agricultural Bank, banking operations are a minor part of the activities of special law banks. 1/ This is the result of a number of influences, the most important of which are the maturing of their obligations (especially a retirement "bulge" expected from 1975), the additional burden placed on them by the 1970 Personnel Law, the low rate of return on their investments, and Parliament's unwillingness to raise the insurance premia. - 16 - Table 7: BANK LOANS AND DEPOSITS AVERAGE OUTSTANDING AT YEAR END 1963 TO 1972 Special Law Banks Other National Banks (TI millions) Loans /1 17,732 11,170 Deposits 12,260 16,552 Official (2,897) (579) Other (9,362) (15,973) (Percent) Deposits as percent of loans 69.1 148.2 Non-official deposits as percent of loans 52.8 143.0 /1 Defined as credits, advances, bills portfolio, and debt current accounts. Source: Banks Association of Turkey, "Balance Sheets....," 1963 to 1972. 34. The heavy reliance of specialized institutions on government fi- nancing ties the level of lending of these institutions closely to the budgetary situation of the government. Pressures on government resources in recent years, for example, were associated with a drop in the share of public conmercial banks and the SIB in total assets of financial institu- tions which fell to 46% in 1971 from a level of 53% in 1968. (The share of the Central Bank, however, rose rapidly, reflecting the issue of cur- rency.) The pressure on government resources is likely to intensify over the Third Plan period, and the relative importance of these specialized institutions may consequently continue to decline. Thus, unless the rather rigid compartmentalization of the financial system is relaxed, or the gov- ernment succeeds in expanding its borrowing, credit to the priority sectors would continue to be constrained. 35. - The creation of additional institutions such as the special banks to finance mining and private investment in underdeveloped regions, proposed by the Third Plan, will not solve the financial constraint. An essential element of a solution is to make these sectors attractive to private commercial banks (as is being attempted for medium-term credit, discussed below), and to improve the ability of specialized institutions to raise resources from non-governmental sources. A particular measure which would promote the latter objective is exempting transactions between financial institutions from the - 17 - transactions tax. 1/ Another measure to be considered is removing or raising the ceilings on interest rates so that institutions can afford to raise their borrowing rates and thus expand their borrowing. This argument applies to all institutions that have to rely on non-deposit sources of funds and is particularly relervant to TSKB and SYKB (which finance private industry) and the special law beaks other than the Agricultural Bank. (iii) Subsidized Credit 36. Another selective credit policy that has been used, especially in recent years, is a set of measures that reduce the cost of credit to selected borrowers. The decrease in cost is achieved by setting lower ceiling on interest rates, exempting them from taxes and by paying direct subsidies. The success of these policies should be assessed in terms of three basic criteria: their implementation (i.e., whether the cost of credit is in fact reduced), their effect on the availability of credit, and the equitable dis- tribution of credit. Unless the availability of credit is increased, the effect of reducing its price will be to maintain the stringency of rationing, allow further play to non-price influences (such as "creditworthiness") on the allocation of credit and to increase the monopoly rent of those few who are privileged in having access to the scarce supply. 37. Credits for export-oriented projects are exempted from the banking transactions tax (Appendix Table 1, footnote 3). 2/ Since banks pass the burden of the transactions tax to the borrower, this exemption may be expected to be effective in reducing the cost of credit to the borrower. The measure is, however, neutral in relation to the availability criterion. 38. Credit for exports to agriculture and to small artisans (by the People's Bank) have interest rate ceilings that are 3% lower than for other short-term credits; the last two also enjoy a 3% preference on medium-term credits. At least some of these differential interest rate measures will satisfy the implementation criterion. Since People's Bank credits and agri- cultural credits are made exclusively by specialized institutions which are publicly owned, these ceilings should be easy to enforce. The lower ceiling on short-term export credits is more difficult to enforce since such credits are made by private banks who, as noted above, have a variety of ways in which the effective cost of credit can be increased well above any given nominal rate of interest. Strict enforcement would probably tend to reduce the volume of such credit which earns 9% compared with "general" credits to the same 1/ The revenue impact of this exemption is not precisely known, but is esti- mated to be very small. The transactions tax itself yields considerable revenue to the central government. However, the high rate of the tax (25%) has stunted the growth of transactions between financial institu- tions. Consequently, the revenue impact of the exemption proposed here will be less than one-half of one percent of consolidated budget revenues. 2/ The tax is levied at 25% of the interest rate plus commissions. The effect of the exemption on the cost of credit is about 3 percentage points for short-term export credits (with a nominal interest rate of 9%) and 4 percentage points for medium-term export credit (with a nodnal interest -18- borrower which earn 10.5%. The differential interest rate ceiling on short- term export credits, therefore, probably will not achieve its objective. The lower ceiling on agricultural and People's Bank credit, though enforceable, fails the availability criterion, since these specialized institutions cannot raise more resourcec commercially when their maximum rate of earnings is only 9% while the low interest rate raises demand for their funds. This situation enforces their dependence on government financing, with a consequent restric- tion on their expansion, as noted above. 39. Direct subsidies to lenders or borrowers have been in force since 1970, but their implementation record has, so far, been very poor. Credit to specified sectors was to benefit from a.subsidy of 1% to 2% paid to com- morcial banks and another 1-4% paid to the borrowers. The scheme would slmul-aneously have increased the demand for priority credits (by making them cheaper) and increased the supply of priority credits (by increasing the return to banks), thus satisfying the availability criterion. But the scheme was never fully implemented because sufficient budgetary transfers were never made to the "Selective Credit Fund" from which the subsidies were to have been paid. In 1973, the above scheme was replaced by another which abolished the subsidy to banks and kept most of the subsidies to borrowers at approximately the previous level; approved medium-term credits, however, were given a higher subsidy of 6% (see Appendix Table 1 for details). The Selective Credit Fund is to be financed from the budget and from the Interest Equalization Fund which receives the difference between domestic and foreign interest rates on foreign borrowing by Turkish entrepreneurs. It is not clear yet whether the scheme is fully operative, although the intentions are more serious. Judgment must, therefore, be reserved on the implementa- tion criterion. It is also not clear why banks would increase the supply of such credits, particularly since they involve additional administrative complications, unless they receive some compensation. 40, In summary, selective credit policies that seek to influence the cost of credit are unlikely to achieve their basic objective of encouraging the expansion of activities for which the specified credits are intended. With the exception of tax exemptions, the other measures are either unlikely to reduce the cost of credit or may actually reduce the availability of credit to priority sectors. (iv) Central Bank Advances 41. The Central Bank has made systematic use of its advances and re- discount facilities to direct the flow of credit from the banking system to priority areas; specifying rediscount limits for each bank, each sector and even each borrower. On average during 1961-1971, banks' liabilities to the Central Bank were 14% of their credits. The special law banks, however, had privileged access to the Central Bank and the corresponding ratio was 31% for the Agricultural Bank and 42% for the People's Bank. While the Central Bank is authorized by law to accept a wide variety of bills for rediscount, it has shown a preference for credits related to priority areas. This policy - 19 - has been used to encourage private banks to make credit more easily avail- able for export (e.g., tobacco sales credits) and for preferred industries specified in the annual programs. 42. In addition, the rate of interest charged by the Central Bank on its advances has also been lower for priority sectors. Until 1973, redis- counts of short-term credits for exports, agriculture, small businesses, and priority industries cost 1.5% below that applicable for general redis- counts (see Appendix Table 1). In 1973, the lower interest rates were applic- able only to medium-term credits for agriculture and exports. The reduced cost of these rediscounts is intended to make commercial banks more willing to extend priority credits. In 1970, the maximum maturity the Central Bank could accept for rediscount was raised from one year to five years though the volume.allowed was small. This amendment has been quoted as an important reason for the recent willingness of commercial banks to make medium-term credits. (v) Medium-Term Credit 43. The growth and maturing of Turkish industry has created the need for rapid expansion of longer term financing, which has been particularly scarce. In its efforts to meet this scarcity the government used a wide range of policy instruments that are available to influence credit alloca- tion in Turkey. 44. The first major step was the establishment of TSKB in 1950, fol- lowed by SYKB in 1963 and SIB in 1964. 1/ We have noted that, as a result of the structure of interest rates (which does not provide a sufficient margin for long-term lending), TSKB and SYKB have remained rather small, financing no more than 10% of private manufacturing investment in the country. The resources of SIB have grown rapidly but not half as fast as public fixed investment. For reasons noted earlier, the role of SIB as net financier of public investment has dwindled to very small proportions in recent years. Basically, all three institutions have been constrained by the low ceiling on their lending rates which prevents them from raising enough resources. Their share in the total assets of financial institutions has fallen from 21% in 1962 to 11% in 1971. 45. Another measure tried during the sixties was the improvement of. the securities market, with little or no success as discussed later in this chapter. 46. Since 1970, the emphasis has been on increasing the flow of medium- term credit (having maturities of one to five years) from the commercial banks. Prior to this, only small amounts of long-term and medium-term 1/ Sumerbank and Etibank, established in 1933 and 1935 may be considered precursors of these institutions; but their role was conceived of primarily as holding companies for state economic enterprises. - 20 - credit were extended by banks, mostly by special law banks. As noted earlier, medium-term bills became eligible for rediscount by the Central Bank in 1970. In 1972, the Central Bank required the 20 largest banks (excluding the special law banks) to provide at least 10% of their commercial credits in medium-term maturities by the end of the year. Most of the banks are said to have satisfied this requirement and medium-term credit to the private sector increased from TL 2.2 billion in 1970 to TL 4.0 billion in 1972. It is not clear, however, to what extent the increase is real or represents a reclassification of previous short-term credits, especially to the bank's more favored customers. The quota requirement appears to have been extremely successful, however, in forcing the larger private banks to think seriously about improving their long-term credit operations, establishing project appraisal units, etc. 47. In 1972, the banks were operating under a disadvantage imposed by the structure of interest rates. The maximum interest rate permitted for medium-term credits was 12%, only 0.5% higher than the maximum for short- term credits. There was little incentive to banks to incur the additional costs and risks involved in medium-term credit, especially as this was a relatively new type of business. In 1973, the maximum interest rate for short-term credit was reduced to 10.5% and that for medium-term credit un- changed; the spread, therefore, is now increased to 1.5%, making medium- term credit relatively more profitable to banks. The profitability of medium-ter.i credits has been increased further in 1973 by reducing the cash reserve requirement from 25% to 20% for a portion of demand deposits cor- responding to the amount of medium-term credits extended by the bank to priority sectors as defined in the annual programs. The effect of this provision is to raise the rate of earnings on medium-term credit by about 0.3 percentage points. 48. The net effect of these measures will be to increase the supply of medium-term credit; but the demand will also be increased considerably as a result of the decree providing a 6% subsidy to borrowers and some tax exemptions for medium-term credit for investments in approved sectors. This would reduce the cost of medium-term credit from about 20% to about 13% for many sectors and to 8% for export-oriented investments. It is likely that demand for medium-term credits would greatly exceed the supply and there is a need for bolder policy measures to make medium-term lending more attractive to commercial banks. A very effective measure would be to allow greater flexibility to banks in setting interest rates. Some additional steps would also be useful. One measure which has been recommended above is the exemp- tion of transactions between financial institutions from the banking and transactions tax though this may mean a small loss to the budget. This would encourage commercial banks who alone are able to mobilize deposits to lend to development banks who are well equipped for this type of lending. An increase in the minimum quota of medium-term credits above the present level of 11% could be effective, as window-dressing by the banks becomes more difficult. Greater use of the differential reserve requirement ratios can also help by making medium-term credits definitely more profitable to banks. In summary, the various measures should aim at widening the spread in the interest rates for different maturities. - 21 - IV. THE SECURITIES MARKET (i) Public Debt 49. The bulk of non-monetary financial liabilities is issued by the public sector. While public domestic debt increaaed by TL 23.4 billion in the last decade, private corporate bonds increased by about TL 0.6 billion and the nominal share capital of corporations by about TL 14.8 billion. The greater part of the domestic debt of the public sector is not part of a securities "market." A substantial amount of government debt is the result of "consolidation" of the debts of other public sector agencies, primarily the liabilities of state economic enterprises and municipalities to banks. Consolidated debts amounted to 71% of the outstanding debt in 1963 and 31% in 1972. Secondly, very little of the increase in government debt from 1963 to 1972 can be said to represent a "voluntary" increase resulting from the willingness of lenders to hold larger amounts of the financial liabilities of the government. As shown in Table 8 a third of the increase was SIB bonds which are taken up almost exclusively by the public social insurance agencies. Another 27% was the increase in Compulsory savings bonde which absorbed 3% of all income and profits liable to income or corporation tax. 1/ In 1972, this scheme was replaced by an equivalent rate of tax. The issue of long-term and short-term government bonds contributed 27% of the increase in public debt, and this was made possible partly by statutory requirement and moral suasion, and, in recent years, by attractive return and high liquidity. 50. Short-term government bonds (known as Treasury bills or Treasury Placement bonds) have maturities of less than one year and offer an interest rate of 10.5% per annum (which amounts to about 7.9% after tax). The long- term bonds are issued with 20-year maturities and, since 1q70, offer an interest rate of 9% free of all tax. There has been a very significant in- crease in this form of government borrowing in the last decade, but more than half of the increase was achieved in 1972 (Appendix Table 9). 51. In part, government bonds enjoy a captive market: commercial banks are required by law to invest 5% of their earnings each year in government bonds; banks have to maintain a liquidity reserve requirement of 10% of all sight liabilities for which government bonds are an eligible asset; corpora- tions are legally required to maintain a contingency reserve for which gov- ernment bonds and other public sector bonds are the only eligible assets; and government bonds are accepted as security in bids for public works con- tracts. The purchase of long-term government bonds, however, also enjoys significant advantages (which are qualified below): the interest receipts are tax free and the buyer does not have to disclose the size of his hold- ings: and they are almost perfectly liquid, despite a maturity of 20 years at issue. 1/ From 1967, incomes below TL 14,400 per year were exempt. -22- Table 8: DOMESTIC PUBIC DEBT, 1963 to 1972 .(TL millin as nf eritt Dsember) Cut,tandäng Dobt increae . .63 19r2 TL 7 Short-Term Governinent 531 1,326 795 3 Debt long-te.m Goverrnic.ent •Bonds 737 6,286 .5,5I9 2b Compulsoryr Savings Bonds 1,232 7,592 6,360 27 State Tnvestirnit Fnk Bond 669 8,590 7,921 34 Consolidated Municipa1-. it.es Debbs --- 2,88 2,&68 11 /3· Other Debtv-- 7,861 8,137 276 Total 13,030 3),419 23.389 100 Percent of G1JP 17 15 .L Trcasury bills and placement bonds. /2Iiclucing ..mortization and Credit Lund bonds. /3 Indluding debts c,rnsclidated under Iavs 154 and 250 which anounted to TL 7,036 rillion in 1963 and TL 7,380 nillion in 1972. Source: Appendix Table 9. - 23 - 52. The tax-free feature and greater security make the government bond yield of 9% more attractive than the corporate bond yield of 15% to individuals who pay a marginal tax rate exceeding 40% and to all taxable corporations. How- ever, the tax-free provision is useful only to those individuals who actually pay their taxes at a rate exceeding 40%. Most individuals do not declare their interest earnings or corporate bonds but pay only the withholding tax of 20%, a rate which leaves corporate bonds yielding more than government bonds. There is now a proposal to raise the rate of withholding on bearer securities to 35%, which %ould practically eliminate this advantage enjoyed by corporate bonds. 53. Government bonds are almost perfectly liquid: they can be cashed in at any time, the only penalty being the loss of accrued interest since the last coupon payment (even this penalty was absent before 1970). However, since the transactions are routed (on a bookkeeping basis) through the Istanbul Stock Exchange, they incur a fee of 0.65% on each transaction. The govern- ment may also put pressure on institutions (such as banks) when they wish to cash sizable amounts of government bonds at an inopportune time. 54. Despite all their advantages, government bond sales have been made mostly to financial institutions (Table 9). Of the total amount of TL 8.9 billion of long-term government bonds issued from 1953 to 1972, 29% was sold to public institutions (mostly social insurance agencies) and, therefore, does not represent addition to the public sector's resources; nearly 50% was sold to banks and, therefore, does not represent additional mobilization of financial resources for the economy. About 4% was bought by private companies, primarily to fulfill statutory liquid reserve requirements. Only 17% was sold to private persons. Table 9: LONG-TERM GOVERNMENT BOND SALES 1953 - 1971 1972 Purchased by TL million % TL million % Banks 2,490 51 1,905 48 Private Companies 222 5 156 4 Public Institutions 1,280 26 1,298 32 Others 866 18 641 16 TOTAL 4,858 100 4,000 100 Source: Appendix Table 10. -24- 55. As shown in Table 9, the issues in 1972 amount to nearly as much as the total issues in the preceding 19 years, but the pattern of purchasers has changed little. The sale of government bonds worth TL 641 million to the public is, nevertheless, a notable achievement partly a result of extensive advertising. It is nearly three times the volume of (private) corporate.bond sales in the year -nd nearly as much as the total sales of government bonds in most previous years. (ii) Corporate Bonds 56. Corporate bonds in Turkey consist of 5- to 10-year bonds issued by about 70 large industrial corporations, usually guaranteed and underwritten by prominent banks and holding companies. The practice of issuing bonds by corporations started only in 1967 and the volume of outstanding issues has grown to an estimated TL 760 million at the end of 1972. The market appears to have been expanding significantly although the issues in 1971 were low because of an uncertain investment climate (Appendix Table 11). The bond market recovered in 1972 and the first five months of 1973 saw an issue of TL 196 million, with 13 new firms making their first bond issues between October 1972 and May 1973. However, corporate bond issues still finance only 3-5% of private investment in manufacturing. 57. Other than some general restrictions placed by the Commercial Code, the corporate bond market was entirely free of official regulation until June 1970 when a number of restrictions were imposed and the Central Bank undertook the task of supervision. The most important regulations now in force are: a ceiling of 15% on the interest coupon with a stipulation that bonds cannot be issued at a price below par; a ban on lotteries; a require- ment that bonds outstanding should not exceed the firm's paid-in capital; a minimum maturity requirement of five years; and a requirement that all bond issues should be sold through banks (including the development banks), though not necessarily guaranteed by them. Issuing bonds through banks serves to inform the Central Bank about the terms of the issue but there is no attempt to regulate the issues in any other way. Corporate bonds may still be sold entirely through private placement, sometimes with the firm's own shareholders. 58. important effe,ts of the regulations, however, have been to make access to the market more favorable to the more established firms, and to greatly increase the importance of having an issue underwritten by a bank. The latter, however, considerably increases the cost of bond issues to the corporate borrower and tends to reduce the sunply of bonds. With the com- mission paid by the borrower to the bank that guarantees and underwrites the bond issue, the transactions tax on these commissions and various other charges, the effective cost of a croporate bond to the issues rises to 20% per annum. (The details are given in Appendix Table 20.) However, the cost is substan- tially less if the bond issue directly finances fixed investment for which the government has awarded an "Encouragement Certificate." This would entitle an exemption from corporate tax of part of future net profit equal - 25 - to a certain percentage of the investment financed by equity or corporate bonds. The percentages allowed depend on the economic sector, region, and size of the investment, and generally range from 30% to 50%. With a 50% tax allowance, the cost of corporate bond issue falls from about 20% to about 15% for a new company and half a percentage point less for a project under- taken by an established company which earns profits from its other operations. This compares with about 20% effective cost of borrowing from comnercial banks. 59. The major reason for the slow growth of the corporate bond market, particularly in the current inflationary situation, is the ceiling of 15% placed on interest rates offered. Interest payments to individuals are subject to a 20% withholding tax, reducing their earnings to 12%. Interest earnings of banks and insurance companies are subject to the 25% transactions tax, reduc- ing their earnings to 11.25%. Only tax-free financial institutions (such as pension funds) can actually receive a full return of 15% on their bond hold- ings. In comparison individuals can earn 9% on their time deposits at banks 1/ and banks earn about 15% on their credits. Thus the demand for corporate bonds is reduced. 60. Furthermore, the liquidity of corporate bonds is rather poor becase the secondary market essentially consists of a few brokers in Istanbul. The larger institutions (such as banks and TSKB) are required to pass all their secondary transactions through the Istanbul Stock Exchange, thereby incurring a charge of 0.65% to each party in each transaction. Consequently, although the interest ceiling* is not applied to secondary market transactions, most corporate bonds are held until maturity. 61. With demand continuing to be strong, the scope for the further devel- opment of the corporate bond market, though difficult to assess, will largely depend on removing the ceiling on their interest earning, reducing the costs of issue and transactions and on the growth of funds seeking term investment e.g., from tax-exempt private pension funds, insurance companies and commer- cial banks. Allowing institutions to channel their secondary market activities through banks and other channels than the Istanbul Stock Exchange (or reduc- ing the heavy commission expenses of the stock exchange) would also expand the market and encourage demand. (iii) Corporate Equity 62. The information on the equity market in Turkey (derived primarily from the legally recorded changes in the nominal capital of firms and a partial record of transactions at the Istanbul Stock Exchange) shows that although the volume of corporate stock is large, the market in such stock is extremely weak. Most firms in Turkey are closely held corporations and finance their new investment primarily out of retained earnings and deprecia- tion reserves. When additional capital becomes necessary, it is raised from existing owners rather than by increasing the number of shareholders and dis- sipating control. There are very few offers of stock to the public. 1/ Interest payments on deposits are subject to income tax only if intorest payments exceed TL 500. In practice, the tax can be evaded to some extent by maintaining multiple accounts in different branches. - 26 - 63. Commercial banks and TSKB are significant institutional investors in corporate stock but only TSKB has deliberately acquired an equity port- folio with the intention of trading in it. The size of TSKB's portfolio has grown to TL 126.2 million-in 30 companies at the end of 1971 and the proportion of its portfolio that has been traded each year has varied from 9% to 25% in recent years. This has been the main supply of private corporate stock for the individual savers and has totalled only TL 130 million from 1963 to 1971. The commercial banks' portfolio of corporate stock is much bigger, TL 2.6 billion at the end of 1971. More than half of this repre- sents participations in public enterprises (by special law banks). But private commercial banks also regard their investment in private corporate stock as long-term investment. They have tended to acquire large (often controlling) interests in corporations and there is practically no turnover in their portfolio. 64. Since 1962 there have been many studies and draft bills aimed at widening shareholding and providing safeguards to small investors, but with little result. The nrincipal recommendation of the most recent bill is the establishment of an autonomous Capital Market Control Commission, whose main task would be to assure true and adequate disclosure of all rele- vant facts regarding securities at the time of public offering and on a continuing basis. The recent bill dropped previously recommended strict criteria for defining "Joint Stock Companies open to the Public," and the various tax advantages and preferred access ,to credit that they would have been accorded. In the new bill, the advantages of being "open to the public" would consist only in access to the capital market, simplified procedures for capital increases, more liberal issue of bonds, and indirectly, greater attrac- tion for investment bankers. More important, however, proposed revisions in the corporation tax law would provide tax concessions to firms which have more than 100 shareholders, each of which holds less than 5% of the share capital. Other provisions of note are the insistence on a qualified, inde- pendent audit of the financial accounts of firms (the Capital Market Control Commission would have the power to appoint an additional auditor), special provision for the encouragement of underwriters and investment companies, and the wide supervisory role of the CaDital Market Control Commission. 65. It would be unrealistic to expect any immediate benefits from the passage of the Capital Market Bill, although it is of great importance in the long run. Developing an active securities market will inevitably be a slow process, and the provision regarding independent audit of financial accounts will not mean much until there is a system of certifying account- ants. As yet, buyers of.corporate stock do not appear even to distinguish between dividend yield and the rate of return including capital gains. The liquidity of corporate stock is undoubtedly very low and the risks appear to be quite high. An analysis of 48 investments made by TSKB from 1952 to 1971 showed that 13 yielded no positive return at all, 12 yielded only a modest return (between 1% and 9% per year) and 23 yielded returns of at least 10%. Even within the last category, there was considerable dispersion, - 27 - with three investments yielding above 50% per year. The rate of return to TSKB on all its equity investments (including dividends -and capital gains) averaged 12.6%, compared with 8-9% on its loans over the same period. Given the risks, the difference in the rates of return would seem inadequate to encourage much widening of the equity market. Table 1: MAfIMUM LENDING INTEREST RATES (In annual percentages) 1961 1970 1973 Interest Rate Effective Rate: Paid by Borrower After Subsidy I. Short-term Credits A. General Interest Rate 10.5 11.5 10.5 10.5 B. Differential Interest Rates 1. People's bank credit to artisans and small businesses 9.0 10.5 9.0 8.0 2. Agricultural credits* a. General Rate 9.0 10.5 9.0 8.0 b. From proceeds of Agriculture Bank's bonds 5.0 3.0 3.0 3.0 3. Export credits:/2 a. General Rate 9,0 10.5 9.0 6.0 b. If rediscounted with Central Bank - 9.0 7.5 6.0 4. Preferred Industrial Credits - 10.5 10.5 10.5 II. Medium-term Credits A. General Interest Rate 10.5 12.0 12.0 12.0 B. Di-fferential Interest Rates 1. People's bank credit to artisans and small businesses 9.0 12.0 9.0 8.0 2. Agricultural credits 7.0 10.5 9.0 8.0 3. Export credit:/2 a. General Rate 9.0 12.0 12.0 8.0 b. If rediscounted with Central BankL3 - 12.0 10.5 8.0 4. Credits to sectors (except the agri- cultural sector) specified in the General Schedule of Encouragement of the Annual Progr=Lm4 - 12.0 12.0 6.0 III. Central Bank Rediscount 1. General Rediscount Rate 7.5 9.0 9.0 9.0 2. Credits for exports, small businesses and artisans, preparation and manufacturing of exports subject to certificates, agriculture 5.25 L5 7.5 9.0 9.0 3. Bills of priority industry branches - 7.5 - - 4. Medium-term credits: a. General - 9.0 9.0 9.0 b. Exports, as specified in Annual Program - - 8.0 8.0 c. Agricultural credits - - 6.0 6.0 5. Advances against bonds 10.0 11.0 10.0 10.0 6. Advances against gold 6.0 7.0 6.0 6.0 IV. State Investment Bank Lending Rate - 9-10.5 9.5-10.5 9.5-10.5 V. Bond Rates 1. Government long-term bonds 6.0 9.0 9.0 9.0 2. Private corporations - 15.0 15.0 15.0 1 The effective rate paid by the borrower who receives the subsidies provided for in Decree No. 7/522, effective March 1, 1973. The subsidy will not be paid if the credit is extended out of special funds or from credit sources obtained abroad, and is noz applicable to credits made by the State Investment Bank. The subsidy is increased by 1% for credits for investments in underdeveloped regions. 2 This covers two types of export credits: (a) for the period between delivery of sales documents to the banks and receipt of payments by the banks; and (b) for the preparation and manufacturing phases of export goods. / Credits made for export-oriented projects are exempt from the 25% Banking Transactions tax provided a special encourage- ment certificate is obtained. Credits of any maturity and from any source of financing are eligible. Since the exemption also applies to the interest paid on Central Bank rediscounts, the bank is expected to change a lower interest rate. /4 Sectors specified in the 1973 Annual Program, excluding the agricultural sector. /5 Does not include credits extended for the preparation and manufacturing of exports subject to certificates. Source: Ministry of Finance. Table 2: MAXIMM4 INTEREST RATES ON DEPOSITS (In annual percentages) 1961 1970 1973 Deposits with Banks Sight deposits saving 3.0 3.0 2.5 Commercial 2.0 1.0 0.0 Official 2.0 1.0 0.5 Interbank 2.0 1.0 (free) Time deosits 4 to 0 months 4.0 4.0 4.0 /1 6 months to 1 year 5.0 6.0 4.0 71 1 year to 18 months 6.0 9.0 7.0 77 more than 18 months 6.5 9.0 9.0 75 Interest rates payable to banks on cash reserve requirementssdth the Central Bank Cash reserves corresponding to sight deposits and deposits of a term up to one year 4.0 4.0 4.0 Cash reserves corresponding to deposits of 1 year and more 6.5 6.5 7.0 Penal interest rates payable by banks failing to establish cash-reserve require- ments with the Central Bank in due time Cash reserves corresponding to sight deposits and deposits of a term up to 1 year - 4.0 Cash reserves corresponding to deposits deposits of 1 year or more - 1.0 /1 3 months to 1 year. /2 1 to 2 years. /3 Over 2 years. Source: Central Bank of Turkey. Table 3: MONETARY SURVEY, 1952-1961 (Billions of liras) 1952 1953 195h 1955 1956 1957 1958 1959 1960 1961 Foreign Assets L 0.55 0.58 0.57 0.58 0.63 0.75 0.0 0.714 2.27 2.13 Net Claims on Public Sector 1.18 1.50 1.66 2.62 3.09 4.96 5.35 5.99 5.64 7.52 Net Credit from Central Bank F.Oi 1.19 1.27 2.03 2.13 3.09 Credit (1.15) (1.35) (1.37) (2.16) (2.25) (2.94) (3.25) (3.66) (3.59) (0.40) Other Claims[j (-) (-) ( )-) )) -)) -))(.-) (0.16) (5./(3) Less: Public Deposits (0.11) (0.16) (0.10) (0.13) (0.12) (0.12) (0.36) (0.28) (0.66) (0.38) Net Credit from Commercial Banks -0.30 -0.29 -0.31 -0.25 -0.19 0.82 0.90 0.79 0.39 -0.20 Credit (0.26) (0.3r) (0.h6) (0.65) (0.89) (2.05) (2.26) (2.48) (2.29) (1.33) Less: Public Deposits (0.56) (0.65) (0.77) (0.90) (1.08) (1.23) (1.36) (1.69) (1.90) (1.53) Legal Reserve Assets /3 0.30 0.It5 0.51, 0.61 0.91 1.00 1.1. 1.26 1.51 1.62 Bonds 0.11 0.12 0.12 0.12 0.10 0.12 0.20 0.27 0.30 0.22 Participations (semi-public) 5 0.03 0.03 0.014 0.11 0.14 0.20 0.25 0.29 0.35 0.43 Claims on Private Sector 2.40 3.12 3.90 1.56 5.17 6.01* 6.77 7.38 7.80 7.58 Credit 2.Y T T B! V.-3 V-_94 T.37 6.92 7.23 g99 Bonds L 0.03 0.03 0.03 0.03 0.03 0.03 0.05 0.07 0.08 0.01 Participations /5 0.03 0.05 0.06 0.15 0.20 0.27 0.34 0.39 0.49 0.58 Other Items (net) 0.119 0.62 0.47 0.32 0-83 0,30 0.01 1.51 2.63 3.21 Total Assets 4.62 5.82 6.60 8.08 9.72 12.05 12-93 15.62 18.34 20.44 Foreign Liabilities /l 0.59 0.46 0.62 0.81 0.75 0.96 0-91 0.95 2.18 1.60 Money Supply 2.112 2.95 3.37 4.21 5.36 6.87 7.42 8.70 26 10.02 Currency 1.15 1.33 17 T 2.32 32. 3.05 % 3.834.1 Demand Deposits j( 1.27 1.62 1.99 2.41 3.0 3.93 4.37 5.29 5.43 5.88 quasi-Money 0.21 0.37 0.32 0.41 0.51 0.80 0.67 1,19 1.27 2.05 Time Deposits 0.19 0.3 0.29 0.32 _079 0.50 0.50. 0.57 0_2 1.09 Deposits with Central Banks 0.03 0.03 0.011 0.09 0.07 0.30 0.17 0.62 0.45 0.96 Commitments 0.17 0.30 0.20 0.4 0.64 0.83 0.89 1.36 2.40 Bonds _:W 0.13 0.22 _2 0.27 0.33 040 0.39 _ Capital and Reserves 1.15 1.61 -177 2.19 ____ 1{ 3.2 .97 Total Liabilities I4.62 5.82 6.60 8.08 9.72 12.05 12.93 15.62 18.314 20.4 1 As shown in International Financial Statistics. IMF 2 The Central Bank classifies these as "claims to be liquidated." They are the result of a consolidation of SEE debt in 1960. 3 Excluding deposits with the Central Bank. It was assumed that 20 of bonds .were public and 84 were private for the years 1952 to 1960, since only tr.e total was available. Small amounts of bonds included are held by the Central Bank. 5 It wao assumed that 112% of participations were public and 58% private for years 1952 to 1961. The Central Bank does not make credits directly to the private sector, but helps finance them by advances to banks. 7 Defined as all sight deposits -- savings, commercial and those held at the Central Bank. Source: Central Bank of Turkey. Table 4: INIARY SURVEY, 1962-72 (TL billions; cutstanding end-December) September December 1962 1963 19614 1965 1966 1967 1966 1969 1970 1971 1972 1972 Foreign Assets A 1.96 2.06 2.05 1.93 1.93 1.98 2.20 3.142 8.6 12.90 18.63 22.1 Net Claims on Public Sector 7.63 9.12 10.12 11.69 12.69 13.60 14.60 16.141 17.29 22.14 24.25 n.a. Net Credit from Central Bank 5.93 _ 7.6 Q?1 9.22 10.06 10.79 12- -3.6 17.25 19.40 1972 Credit (0.88) (1.87) (2.52) (3.06) (4.08) (4.98) (5.73) (7.15) (8.28) (.84) (14.36) (13.54) Other Claims /2 (5.40) (5.io) (5.110) (5.10) (5.40) (5.39) (5.39) (5.39) (5.81) (6.32) (6.32) (6.32) * Lens: Public Deposits (0.35) (0.31) (0.30) (0.25) (0.26) (0.31) (0.34) (0.146) (0.73) (0.91) (1.28) (1.34) Net Credit from Counercial Banks -0.57 -0.18 -0.11 0.49 0.34 0.14 -0.29 -0.29 -0.72 -1.55 -2.38 -2.85 Credit (1.45) (1.72) (1.96) (2.54) (2.57) (2.78) (2.67) (3.00) (3.21) (4.23) (4.62) (5.07) Less: Public Deposits (2.02) (1.90) (2.07) (2.05) (2.23) (2.614) (2.96) (3.29) (3.93) (5.78) (7.00) (7.92) Legal Reserve Assets /3 1.55 1.54 1.51 1.52 1.53 1.59 1.63 1.66 1.75 1.79 1.81 . Bonds 0.24 0.17 0.111 0.51, 0.64 0.86 1.149 1.69 1.66 3.22 3.91 n.a. Participations (semi-public) 0.48 0.63 0.69 0.93 0.96 0.95 0.99 1.27 1.24 1.43 1.51 .a. Claims on Private Sectors 9.63 10.94 12.33 114.22 18.31 21.32 25.72 31.11 34.87 39.80 45.26 n.a. Credit /.91 TO.16 1 17.6 20.59 V90 d5 33 31 3 .5.96 Bonds o0.6 0.06 0.06 0.06 0.05 0.05 0.05 0.05 0.07 0.03 0.02 n.o. Participations 0.66 0.72 0.79 0.60 0.614 0.68 0.77 0.88 1.00 1.17 1.24 n.a. Other Items (net) 2.80 2.50 2.55 2.76 3.31 4.7 9 3.98 7.52 6.75 L n.a. Total Assets 22.02 24.62 27.05 30.60 36.21 40.97 47.11 68.32 81.59 tos.3 10-37 Foreign Liabilities 1 1.62 2.01 1.74 1.36 196 2.00 2.25 8,-68 710 10-96 34.32 Money Supply 10. 12.17 111.00 16.4 19.78 22.68 25. 30.13 35.27 43.59 48.38 53.25 Currency 4.593 -3493 T_ 5716 8377.71 9.24 . 85 13.92 IK.M 15.98 Demand Deposits / 6.411 7.24 8.16 10.11 12.62 13.97 17.73 21.05 23.42 29.67 31.50 37.27 quasi Money 2.23 2.70 2.TT 3.34 14.13 4.97 6.30 7.15 10.48 14.44 16.o40 18.43 Time Deposits 171 1.57 TB TT5 T.1Z VV5.3 T qi 7-.9 13.07 16.22 s Deposits with Central Banks 1.07 1.13 0.97 0.69 0.47 0.55 0.87 0.71 1.58 1.37 0.18 0.18 Comitments 2.55 2.64 3.16 3.82 4.30 4.72 5.45 6.26 5.81 6.02 6.52 6.54 Bonds 0i. 2 -.79 0.8 0.53 0.53 0.50 0. Fili __i VO_i 0.37 U36 Capital and Reserves E. 23 167 VF 5.-n 5-54 V.10 KTT7 00 n-5 12.47 Total Liabilities 22.02 24.62 27.05 30.60 36.24 40.97 47.11 54.92 68.32 81.59 94.13 105.37 1 As shown in International Financial Statistics. IMF 2 The Central Bank classifies these as "claims to be liquidated." They are the result of a consolidation of SEE debt in 1970. 3 Excluding deposits with the Central Bank. The Central Bank does not make credits directly to the private sector, but helps finance them by advances to banks. Defined as all sight deposits -- savings, commercial and those held at ti,e -entral Bank. n.a. - not available Source: 1,eitral flank of Turkey. Table 5: CONSOLIDATED BANKING SYSTM CREDITS 1952-60 (TL billion, outstanding end-December) 1952 1953 1954 1955 1956 1957 1958 1959 1960 A. PUBLIC SECTOR General 0. 0.02 0.18 0. 0. 0.61 0.60 0.95 1.23 centra Bank " (Short-tomn advancce to (.2 0(.5 .6 Troasury) <0.02) (-) (0.03) (0.31) (0.49) (0.57) (0.54) (0.65) (0.86) (.Oter laim) 1('.) (.. (. (.) (-) (..) (-) (-) (0.16) (Other) ± ~ (0.02) (0.02) (0.15) (0.04) (0.05) (0.04) (0.06) (0 ) (0 ) ABn s Bu0et .16 0.16 0.20 0.21 0.27 0.30 0.27 0.35 0.38 An76e Buge.~ 0 . 21 ~ 0.30 0. "0 0.37 (Monopo.es Administration) (0.10) (0.11) (0.11) (0.12) (0.20) (0.22) (0.22) (0.26) (0.32) (Other) (0.06) (0.05) (0.09) (0.09) (0.07) (0.08) (0.05) (0.05) (0.05) Banks - - - - - - - 0.4 0.01 Local Administratior/2 0.11 0.17 0.23 0.27 0.33 .,,3 , :60 0_, 0.86 Other Official Adminis-zrations 0.9 0.21 0.26 0.27 }0.' 0.62 0.50 0.15 0.1h Central Bank 07 3.07 5.w -7 Ö_ 0.09 0 -0I « - Banks 0.12 0.17 0.19 0.21 0.24 0.51 0.37 0.01 - State Economic Entermrises 0.91 1.12 0 1.64 1.8 2.80 .0 1. 57 3.2L Centra. anic M 0.2 M T35 (Soil Products Office) (0.52) (0.76) (0.71) (0.49) (0.52) (0.92) (1.37) (1.55) (1.56) (Sugar) (0.08) (0.09) (0.13) (0.21) (0.25) (0.31) (0.35) (0.h3) (0.45) (Other) (0.29) (0.25) (0.08) (0.4) (0.58) (0.69) (0.53) (0.53) (0.15) Banks 0.02 0.02 0.03 0.10 0.13 0.88 1.05 1.06 1.08 SeiPbi/2 - - 0.01 0.07 0.19 0.23 0.2L 0.3 0.19 Semi-Public-- _-__-____i ;0 ,19 :. & O:l 01 TOTAL PUBLIC 1.h1 1.71 1.83 2.81 3.1h 4.99 5.51 6.1L 6.ob of Whichi Central BankM 1.35 1.7 rn T25 T. 7 3 5 Of Which: 3anks 0.26 0.36 o.46 0.65 0.89 2.05 2.26 2.8 2.29 B. PRIVATE SECTOR Agriculture 1.05 1.20 1.48 1.54 1.87 2.10 2.14 2.29 2.39 Industrial banks 0.0 0.07 0.11 0.14 0.14 0.16 0.18 0.21 0.22 Building & conetruction 0.12 0.17 0.23 0.35 0.38 0.43 0.46 0.53 0.63 Small artisans, et-. 0.01 0.02 0.04 0.06 0.06 0.07 0.09 0.10 0.12 Commercial & other 1.13 1.59 1.95 2.30 2.U8 2.98 3.50 3.79 3.86 TOTAL PrIVATE . - . 3.481 -94 5L7 6.38 6.93 7.23 n, CONSOLIDATED BANKING SYSTEM 3.75 b.75 5.64 7.19 9.09 10.73 11.m 13.07 13.27 /1 The Central Bank clasaifies these as "Clais to be liquidated." /2 Credits made by banks. / Direct credits only. The Central Bank does not make credits directly to the private sector, but helps finance them by advances to banks. Sour;e: Central Bank of Turkey. Table 6: CONSOLIATED BANKING SYSTE= CRDITS, 1961-72 (TL billion; outstanding end-Decuaber) 1961 196? 1963 1964 1965 1966 1967 1968 1969 1970 1971 19'7 A. PULIC SECTr General Nud et 1 (Sort-tem advancee to Treasury) (-) (0.31{)(0.39) (0.60})(1.1h) (1. )( 1.95) (2.18) (3.06) (I.36) (6.09) (7.62) (.7) (Other claims) 5.3 (5.o) (5.o) (5.o) (5.o) (5.J2) (5.39) (5.39) (5.39) (5.1 (6.32) (6.32) (6.32) (Other) (0.05) (0.01) (0.42) (0.57) (0.66) (0.69) (0.68) (0.67) (0.66) (0.32) (0.29) (0.26) (0.26) Banks 0.16 0.21 0.16 0.15 0.16 0.22 0.09 0.15 0.21 0.29 o.36 0.38 0.36 Annexad Budget 0.07 0.01 0.09 0. L 2 0.72 0.77 1.21 1.76 1.76 1.7 1.75 Central Rank 0-9 - .5 . r51 .3 1.75 (Monopolies Administration) (0.05) (-) (0.08) (0.34) (0.2) (0.72) (0.75) (1.21) (1.75) (1.75) (1.75) (1.75) (1.75) (Other) (-) (-) (-) (-) (-) (- 1/ (-) (-) (-) (-) (- ) BAnk5 0.02 0.01 0.01 - - - 0.02 -. n201 0.01 - - - Local Admniiistratien- 0.92 0.97 1.0,) 1_17 1. 21 1.28 1.0 129 1 . 2 .52 2.64 Other Official Acjinietrations - - _ - - - - - - - Central Bank - - - - - - - - - - - - - Banks - - - - - - - - - - - - - State Econani Enterprises 0.3 0.52 1.01 1.24 1.17 1.67 2.1 2.2 2.3 2.77 L.8L 5.5 5.74 Central bank .JT r " TC M T7T. I "r -4 -Z46 (Soil Products Office) (0.22) (0.32) (0.87) (0.86) (0.57) (0.80Y (1.01) (1.02) (0.95) (1.13) (3.00) (3.75) (3.35) (Suv.ar) (0.09) (0.17) (0.11) (0.16) (0.28) (0.43) (0.60) (0.65) (0.73) (0.71) (0.71) (0.71) (0.71) (Other) (-) (-) (-) (-) (-) (-) (-) (-) (-) (-) (-) (-)(- 0.0h 0.03 0.03 0.22 0.32 o.4b 0.58 0.56 0.67 0.93 1.13 1.39 1.68 Sami-PUl0.18 o., 0.18 0.41 081 0.63 0.78 _0.67 0._4 4 O.Li 0.32 0.3Q TOTAL PUBLIC 7.16 7.73 9.00 .88 11.00 12.05 13.15 13.79 15.54 17. 3 22.39 25.02 2.93 Of Which: Central BankL t7 37T . B .-5 " TM TM . TTM 23 -977 of Whic h: Banks 1.33 1.45 1.73 1.96 2.54 2.57 2.78 2.67 3.00 3.21 4.23 4.62 5.07 B. PRTVATE SECTOR Axriculture 1.68 1.95 2.11 2.99 3.21 4.53 5.55 7.12 8.55 9.03 8.87 7.79 9.78 Industrial banko 0.28 0.33 0.39 0.49 0.59 0.82 1.04 1.25 1.50 2.13 2.39 2.78 2.79 Building & construction . 0.84 1.13 1.29 1.53 1.66 1.77. 1.86 1.90 2.03 2.34 2.52 2.50 2.71 Sall artisan, stc. 0.16 0.18 0.20 0.25 0.31 0.43 0.59 0.78 0.97 1.11 1.27 1.47 1.54 1nercIPI k other L.03 5.31 5.87 6.23 7.79 10.07 11.55 13.86 17.13 19.18 23.56 29. 46 34.05 TOTAL PRI7ATE 6,99 8 10.16 11.48 13.56 7.62 2 24 go 30.19 e t 44.00 50.87 C. CONSOLIDATED HANKINO SYSTM 14.11L 1665 19.17 21.39 24.58 29.68 33.76 38.71 4 -72 51.08 61.00 I02 75.80 /1 The Central Bank classifies thett as "Claims to be'liqidated." /2 Credite made by bar.ka. Direct credita only. The Central Bank does not make crodits directly to the privat osctor, but helpe finance the by advances to banks. Souroce Central Bank o£ Turkey. Table 7: C(tiPOSITION OF DEPOSITS WITII BAIKING SYSTEM, 1961-72 (TL million) Sept. 191 3062 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 :972 Public Deposits 3,905 2371 2,2 2,298 2,1498 j295 3,298- jj!L 14662 6,697 8,280 9.48 With Central Bank 377 3418 307 301 250 265 311 339 455 729 912 1,280 1,335 Consolidated Budget (245) (195) (175) (171) (175) (195) (247) (219) (366) (576) (769) (951) (969) State Economic Enterprises ( 9) ( 5) ( 8) ( 8) ( 5) ( 6) ( 20) ( 46) ( 16) ( 16) ( 20) ( 71) ( 66) Other (123) (148) (124) (122) ( 70) ( 64) ( 44) ( 74) ( 73) (137) (123) (258) (300) With Banks 1,528 2,023 1,898 2,071 2,048 2,233 2,644 2,959 3,288 3,933 5,785 7,000 7,913 Consolidate- Budget (64 2) (967) (720) (805) (725) (772) (1,111) (1,168) (1,203) (1,815) (2,227) (2,832) Local Admniistrations (220) (261) (256) (26) (287) (317) (295) (342) (351) (397) (529) (550) Compulsory Insurance (449) (520) (625) (728) (739) (800) (801) (1,087) (1,310) (1,218) (2,316) (2,699) Other (217) (272) (297) (292) (297) (3114) (437) (362) (424) (503) (713) (919) Demand Deposits 5,885 6,437 7,2hl 8 161 10,108 12,616 1268 17,731 21146 231418 29,670 31,498 1 Savings Sight Deposits 3,967 4.487 5.242 5,934 7,528 9,410 10,390 12,800 15,018 16,819 20,916 21,804 24,929 Commercial Sight Deposits 1,688 1,747 1,805 2,207 2,555 3,181 3,562 4,926 6,014 6,591 8,704 9,463 11,901 Sight Deposits with Central Bank 230 203 194 23 25 25 16 5 14 8 50 231 445 Time Deposits A. 1,093 1 . 1,571 -1798 2,651 3 4,1419 5430 6 86 90 13, 01 18251 Savings 969 1,0114 1,361 1,583 2,293 3,203 3,954 4,913 5,848 8,224 12,313 15,278 17,174 Commercial 124 147 210 215 358 459 465 517 591 679 758 937 1,077 Other Deposits with Central Bank 955 1,072 1,132 688 474 553 867 - 1576 1.366 181 182 Interbank Deposits 803 933 1,091 1,360 8 2811 3,297 4,768 6134 7L216 U,788 16,801 22,580 With Banks 298 271 259 300 1417 505 693 848 1,131 1,817 3,100 5,741 7,879 With Central Bank 505 662 832 1,o60 1,563 2,306 2,604 3,920 5,003 5,399 8,688 11,060 14,701 TOTAL 10 6141 11,974 13,24o 129 17,725 22,061 25,192 32,094 38,1 !57 62,592 72,975 '73 A1 Coormercial deposits are those held by business, including SEEs; savings deposits are defined as all deposits other than public and counercial deposits. Source: Central Bank Monthly Bulletin. Table 8: MATURITY STRUCTURE OF COMMERCIAL AND SAVINGS DEPOSITS, 1963-72 (TL million; outstanding at end of year) 1963 196k 1965 1966 1967 1968 1969 1970 1971 1972 Commercial Deposits 2 0i14 2 421 2,915 3 61 4,035 5 40li 6 60k 7 269 9 463 12 977 0-h months 17 35 57 54 52 38 54 115 128 123 4 months-1 year hi 30 126 171 137 162 187 202 148 433 Over 1 year 149 151 175 23h 276 317 349 361 483 520 Savings Deposits 6 603 7 518 9 822 12 610 143A4 17 714 20 866 25 043 332228 42Z103 Demand t,W *5 9- 9,410 FTlT iT2, i?,767 'T 1 2,9 242929 0-h months 300 356 k67 692 812 990 1,155 1,491 2,485 3,8L6 4 months-1 year 603 631 1,014 1,402 1,739 2,135 2,568 3,784 5,471 8,137 Over 1 year 458 596 812 1,106 1,h02 1,789 2,125 2,949 4,356 5,191 Total 8 617 9 939 12 737 16 251 18 379 23 157 27 40 32 310 4~2 691 55 080 0-4 months 317 391 524- 746 864 1,028 1,209 1,606 2,613 3,969 4 montha-1 year 644 661 1,1 0 1,573 1,876 2,297 2,755 3,986 5,619 8,570 Over 1 year 607 747 987 1,340 1,678 2,106 2,474 3,310 4,839 5,711 Source: Banks Association of Turkey: Balance Sheet, Y&L Accounts, Organization, Deposits and Credits of Banka in Turkey. Table 9: INTERNAL PUBLIC DEBT, 1963-72 (TL million; outstanding as of end-December) 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 I. General Budget 9,672 10,233 -10,913 13,742 1,2 16,669 17,305 1 23,190 25,171 1. Treasury Bills 3114 318 348 348 348 3h8 333 - - - 2. Treasury Placement Bonds 187 381 413 304 338 903 605 978 2,240 1,326 3. Long-term Government Bonds 1i 737 601 721 1,032 1,629 2,012 2,378 2,818 3,238 6,286 4. Domestic Consolidated Debts 2 7,036 6,995 6,933 7,206 7,161 7,112 7,061 7,3ho 7,283 7,380 5. Consolidated Municipalities' Debts 3 - - - 1,763 1,663 1,477 1,401. 892 2,907 2,488 6. Savings Bonds 1,232 1,756 2,375 .' 2,969 3,994 4,686 5,o00 6,244 7,397 7,592 7. Other Debts 4 136 152 123 120 -.136 131 127 130 125 105 II. Annexed BudgetL - State Waterworks Bonds 20 l2 17 16 14 13 11 9 7 5 III. State Investment Bank Bonds I 669 991 1,737 213 3O31 LM 5,719 .6776 7,26 ,5 IV. State Economic EnterprisesL 573 658 607 590 559 527 693 548 507 467 V. Municipal Bonds 96 90 85 73 67 60 203 192 180 TOTAL 11,030 11,991 13,359 18,946 23,288 29 31,82? 34419 Treasury. 2 Consoidated debts under Law 151 and 250. Cotisol.idated debts under Law 691. Exchange losses paid to the Central Bank under Law 65 and excludes Turkish debt bond 1935 which are included in the external debt repayable in foreign exchange. 5 Treasury guaranteed bond of State Highways and Monopoly Administration are excluded since they have a maturity of not more than a year. Including amortization and credit funds bonds. 7 Agricultural Bank, Real Estate and Credit Bank and People's Bank. Source: Ministry of Finance. Table 10: LONG-TERM GOVERNMENT BONDS, BY CATEGORY OF PURCHASER (TL million) Purchased Iy Year Total Issue Banks Private Public Others comanies Institution 1953 125.0 29.0 8.0 43.0 45.0 1955 108.0 17.0 5.0 74.0 12.0 1956 75.0 73.0 - 2.0 - 1960 250.0 19.9 - 153.0 77.1 1964 200.0 97.2 9.8 32.4 60.6 1965 4oo.o 221.6 21.0 90.0 67.4 1966 700.0 322.1 31.4 292.5 54.0 1967 500.O 268.6 32.8 102.9 95.7 1968 500.0 338.7 23.0 80.1 58.2 1969 6oo.o 348.8 12.5 207.1 31.6 1970 600.0 347.4 28.0 88.5 136.1 1971 800.0 4o6.7 50.6 114.2 228.5 1972 4,0CO.O 1,905.1 156.3 1,298.1 640.5 Total 8,858.o 4,395.1 378.4 2,577.8 1,506.7 %100.0 49.6 4.3 29.1 17.0 Source: Ministry of Finance. Table 1: CORPORATE BOND MARKET Number of Issues TE Million Guaranteed Nn- oarated on- Total their Illding Z Guranteed Total Other Holding Ouaranteed TSEB Banks Corinies TSIB Bank Ompanies 1968 13 5 7 - 1 106.5 25.0 82.3 - 1.2 1969 15 4 8 1 2 170.0 30.0 76.0 50.0 1.0 1970 27 5 3 7 12 331.5 5o.o 16.5 1o.o 155.o 1971 10 3 2 1 4 127.5 35.0 26.o 20.0 46.5 1972 14 4 2 3 5 229.5 43.0 45.0 25.0 - 116.5 1973 (5 month)16 3 1 3 9 195.8 19.8 15.0 35.0 126.0 Total 95 24 23 15 33 1,162.8 202.8 260.8 240.0 459.2 /1 Including issues made by Holding Companies. Sourcei TSKB. Table 12: Is~dCE PREmI , 1962-71 (TL million) Bran4obus of Inuranom 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 Accident 75 81 75 76 92 16 137 155 164 202 Fire 87 93 1o4 111 130 145 161 183 206 254 LI-e 26 30 30 32 31 38 44 52 61 96 Othar2 h hO 47 57 63 77 93 133 192 Total 230 415 250 265 309 363 h21 482 56 74 Reuranoi 61 76 71 75 86 100 116 135 168 255 Grand Total 2QII 321 321 340 396 462 537 627 732 999 G rowth in this category Ji prizarily in transport inurance. Souroe Ticaret Bakanliý Sigorta Murakabc Kurulu, Trkive'de Sizorta Paaliyeti Hakkinda . Table 13: LINE INSURANCE, 1967-71 1967 1968 1969 1970 1971 A. Number of Persons Insured (Thousand) .Tndowet 5.2 60.1 39.0 39.8 52.3 .Individwas .n . 78'T . 3 J Groups 26.8 31.4 10.8 11.2 20.0 Term-Life 51.2 86.6 148.2 91.6 80.8 Individaals 0.5 -TT -- f " --7 Groups 50.7 86.o 147.5 90.9 80.1 Whole-Life 10.7 10.2 14.6 16.5 34.9 Iadi-iduals 2T T97 7 17 Groups 0.2 0.7 2.2 2.8 3.2 Total 116.9 156.7 201.8 147.9 167.9 Inuuvid=al --T- -7F.7- 7r7 4-3-0B 74- . Groups 77.7 118.1 160.5 104.9 103.2 'B. Insured CaritAl (Million TL) Beanoment 783.2 931.5 973.7 1 138 6 1 867 7 Individuaa M-fT OF-7 87 6220 Groups 408.8 494.7 488.8 516.6 806.0 Term-Life 354.9 511.9 740.5 612.9 641.7 Individuals rr.7 -"T-7 ---7 -77 - Groups 337.6 489.2 716.8 588.2 613.6 whole-Life 126.1 160.1 419.4 609.4 1 933 7 Individuals 1M5 =77. 3=." 76. Groupo 0.6 17.6 30.6 52.8 66.7 Total 1,280 0 1 616 0 2 155 0 2,374.0 6,261.0 Individuals 510 602-0 b9.77 7 7Tj . 7 77" Groups 764.0 1,014.0 1,258.0 1,171.0 3,304.0 C. Mathematical .eserves (Million TL) 189.0 211.0 238.0 263.0 308.0 D. Premiun Raceipts (Million TL) 38.0 44.0 52.0 61.0 96.0 Source: Ministry of Cormeroe, Insurance Control Board, Istanbul. Table 14: INSURANCE COMPANIES: DISTRIBUTION OF ASSETS (TL million; end of year figures) 1964 1965 1966 1967 1968 1969 1970 1971 SIARES IE 49.7 46.6 48. 53.1 62.4 67.5 74.1 83.0 Insurance & Reassurance Co. 5.8 6.1 11.7 11.2 12.1 12.6 13.3 13.4 Other CMpanies /l 15.2 19.2 22.3 30.0 33.6 41.4 55.3 6.2 Industrial Iterprises 8.0 .3) Others ( 8 5.9) BxDS IUte Bonds 23.5 27.9 44.1 54.3 61.8 78..0 74.8 107.7 Amortization & Credit Fund Bonds 23.9 22.3 18.1 17.0 17.5 13.0 11.9 9.2 Municipality Bonda 8.3 8.2 8.2 8.2 8.5 7.3 7.2 6.7 Bank Bonds /1 13.5 13.3 19.1 15.2 18.2 18.0 18.7 24.4 Public (18.1) (23.8) Private ( 0.6) ( 0.6) Joint Stock Co. Bonds L .10.2 12.5 4.1 10.3 5.1 5.9 13.5 17.2 Industrial Fnterprisea (11.9) (16.0) Others ( 1.6) ( 1.2) TOTAL (Shares and bonds) 150.2 156.1 176.14 199.6 219.2 243.8 268.8 325.8 CASH AND BANK DEPOSITS 72.5 86.2 96.8 127.3 102.8 129.1 144.1 202.7 FILED ASSETS 42.4 48.1 50.1 56.8 67.7 83.8 107.4 126.7 Lomis 40.6 43.2 44.7 49.4 53.3 62.2 72.0 73.1 OTHER ASSETS 322.6 331.9 382.1 428.2 552.7 61o.4 758.5 955.6 TOTAL ASSErS (Combined Balance Sheet) 628.3 665.5 750.1 861.3 995.7 1,129.3 1,350.8 1,684.2 /1 Breakdowns are not available until 1970. Source: Ticaret Bakanli": Sigorta Murakabe Kurulu, Turkiye'de Sigorta Faaliyeti Hakkinda Raporu. aT= DaZaaZD* Or Cst, LL 1963-67 (TL ilmn outstat s WU-ou .) Private Public 2 Total Bankinganing a . anking Total (including System Systm SIn Total S Syste SID) Industry, Mining 1,741 17.0 400 . 400 11.4 2,141 15.6 2,141 15.6 Agriculture 2,1177 24.2 97 - 977 27.8 3,454 25.1 3,454 25.1 Small Artisans, etc. 202 2.0 . . . - 202 1.5 202 1.5 Housing, Construction 2,527 24.7 - * - 2,527 18.4 2,527 18.4 External Trade, Tourism 1,580 15.4 104 . 104 2.9 1,684 12.2 1,684 12.2 Financial SectorL4 119 1.2 815 - 815 23.2 934 6.8 934 6.8 Distribution, Services _ _ ; I 1 7 2. " 20.14 Total 10,2314 l00.0 3,517 - 3,517 100.0 "3751 100.0 1371100.0 Industry, Mining 1,993 17.2 500 697 1,197 23.6 2,493 15.6 3,190 19.1 Agriculture 3,209 27.6 1,015 - 1,015 20.0 4,224 26.4 4,2214 25.3 ika11 Artisans, etc. 247 2.1 - - * * 247 1.5 247 1.5 Housing, Construction 2,839 24.5 * . - - 2,839 17.8 2,839 17.0 External Trade, Tourism 1,488 12.8 137 - 137 2.7 1,625 10.2 1,625 9.8 Financial Sector4 120 1.0 1,390 * 1,390 27.5 1,510 9.5 1,510 9.1 Distribution, Services 17 14.3 1 IJ 26.2 3 1 3,039 18.2 Total 1".611 1000 136100.010010. Industry, Mining 2,318 16.8 900 1,555 2,455 35.3 3,218 16.8 4,773 23.0 Agriculture 3,427 24.9 853 - 853 12.2 4,280 22.3 4,280 20.7 Small Artisans, etc. 312 2.3 * * - * 312 1.6 , 312 1.5 Housing, Construction 3,075 22.3 - - - - 3,075 16.1 3,075 14.8 External Trade, Tourism 1,864 13.6 229 - 229 3.3 2,093 10.9 2,093 10.1 Financial Sector/4 208 1.5 2,012 - 2,012 28.9 2,220 11.6 2,220 10.7 Distribution, Services 2 18.6 1.410 1.410 0 9 20.7 3 9 Total 1~76 100.0 %404 ~ 100.0 19,170 100.0 20,725 100.0 Industry, Mining 3,1474 19.6 800 2,607 3, 407 37.3 4,274 17.6 6, 881 25.6 Agriculture 4,837 27.2 1,231 - 1,231 13.4 6,068 25.0 6,068 22.6 Small Artisans, etc. 427 2.: - * - - 427 1.8 427 1.6 Housing, Construction 3,257 18.? * * * - 3,257 13.4 3,257 12.1 External Trade, Tourism 1,998 11.3 370 - 370 1.1 2,368 9.7 2,368 8.8 Financial SectorjA 239 1.4 2,619 - 2,619 28.7 2,858 11.8 2,858 10.6 Distribution, Services 3 19.8 1,504 1.504 16.5 5,02 20.7 5,025 17 Total LM 100,0 6,51. ,~ 9LIZ 100.0 214,277 100.0 jL814 100.0 Industry, Mining 4,171 20.0 950 4,268 5,218 44.3 5,121 18.1 9,389 28.8 Agriculture 5,742 27.5 1,612 - 1,612 13.7 7,354 25.9 7,354 22.5 Small Artisans, etc. 585 2.8 - * * * 585 2.1 585 1.8 Housing, Construction 3,385 16.2 - * * - 3,385 11.9 3,385 10.4 Exttrnal Trade, Tourism 2,235 10.7 414 - 414 3.5 2,649 9.3 2,649 8.1 Financial SectorL.4 291 1.4 3.111 - 3,111 26.5 3,402 12.0 3,402 10.4 Distribution, Services 4451 21.4 11 1,413 12.0 5,864 20.7 5,864 18.0 Total 20,860 100.0 7,0 4,268 11,768 100.0 4100o.0 3268o0. 1 Th-s table has been comiled using data from the Risk Centralization Office of the Central Bank and from the State Investment Bank. Public sector consists of the General and Annexed Budgets, State Economic Enterprises and Local Administrations. The State Investment Bank which lands exclusively to State Economic Enterprises. 4 The private financial sector consists almost exclusively or the Bank Liquidation Fund, Source: State Planning organisation, Turkey. Page 2 Table 15: MTCAL DIIrIM OF CEDTS, L 1968-71 (oont±oned) (TL aillionj ouUtaad.g and-Dombr) Private Public__ _ Total Bnking Bansing sanking Tota1 (incuding System S ystem a Total % System 3 s:B)c Industry, Mining 5,576 22.1 1,ooo 6,482 7,482 51.2 6,576 19.8 13,058 32.8 Agriculture 7,370 29.3 1,674 - 1,674 11.4 9,044 27.2 9,044 22.7 SmA11 Artisans, etc. 777 3.1 - . . 777 2.3 777 2.0 Housing, Construction 3,442 13.7 * * - - 3,442 10.3 3,442 8.7 EUternal Trade, Tourisa 2,936 11.7 225 - 225 1.5 3,161 9.5 3,161 7.9 Financial sector& 272 1.1 3,801 - 3,801 26.0 4,073 12.2 4,073 10.2 Distribution, Services . 79 19,0 1,446 1 9.9 6,240 18.7 6,24o 15.7 Total 25L16 100.0 8,146 6,482 ka462 100.,) 333. 100.0 3979 100.0 Industry, Mining 7,024 23.1 1,000 9,554 10,554 54.2 8,024 19.9 17,578 35.1 Agriculture 8,892 29.2 1,684 - 1,684 8.7 10,576 26.2 10,576 21.2 fall Artisans, etc. 971 3.2 . . . 971 2.4 971 1.9 Housing, Construction 3,725 12.2 - - - - 3,725 9.2 3,725 7.5 External Trade, Tourism 3,608 11.8 387 - 387 2.0 3,995 9.9 3,995 8.0 rinancial SectorA 266 0.9 5,217 - 5,217 26.8 5,483 13.6 5,483 11.0 Distribution, Services 5 19.6 1,610 , 8 7 18.8 7,562 15.2 Totl ___ 000 ~ ~ i00.0 4033 100.0 9 0 100.0 Industry, Mining 9,217 27.0 1,000 12,412 13,412 56.9 10,217 22.6 22,629 39.2 Agriculture 9,473 27.8 1,834 - 1,834 7.8 11,307 25.0 11,307 19.6 S11 Artisans, etc. 1,108 3.2 . . - - 1,108 2.4 1,108 1.9 Housing, Construction 4,255 12.5 - * * * 4,255 9.4 4,255 7.4 External Trade, Tourism 3,703 10.8 361 - 361 1.5 4,064 9.0 4,064 7.0 Financial Sector/4' 329 1.0 6,109 - 6,109 25.9 6,438 14.2 6,438 11.2 Distribution, Seices 6,033 17.7 1,848 - 1,848 7 7,881 17.4 7,881 13.7 Total 34.11i1l . 11p15 42.12 23,564j 100.0 45.VO 100.0 57,682 100.0 1971. Industry, Mining 11,437 29.4 1,000 14,674 15,674 51.4 12,437 22.8 27,111 39.1 Agriculture 9,431 24.2 3,709 - 3,709 12.2 13,140 24.0 13,140 19.0 s11 Artisans, etc. 1,267 3.3 - - * - 1,267 2.3 1,267 1.8 Housing, Construction 5,345 13.7 - - - * 5,345 9.8 5,345 7.7 Erternal Trade, Tourism 4,111 10.6 537 - 537 1.8 4,6-8 8.5 4,648 6.7 -i---nsc-- 295 0.8 7,838 - 7,838 25.7 8,133 14.9 8,133 11.7 Distribution, Services 7,006 18.0 6 - 17.7 ,703 14. Total 23,892 100.0 15,781 4j,674 4 10. 5100.0 00.0L9,34 100.0 FLow 1963 To 1971 Industry, Mining 9,696 34.0 600 14,674 15,274 57.0 10,296 25.0 24,970 45.0 Agriculture 6,954 24.0 2,732 - 2,732 10.0 9,686 24.0 9,686 18.0 Small Artisans, etc. 1,o65 3.0 - . . - 1,065 3.0 1,065 2.0 Housing, Construction 2,818 10.0 - * * * 2,818 7.0 2,818 5.0 External Trade, Tourism 2,531 9.0 433 - 433 2.0 2,964 7.0 2,964 5.0 Financial Sector/ 176 1.0 7,023 - 7,023 26.0 7,199 17.0 7,199 13.0 Distribution, Services 5 19.0 1.476 5-0 6,894 17.0 12.0 Total 28,65 100.0 12,264 14,6748 100.0 40,922 .100.0 :5,59 100.0 1 This table has been compiled using data from the Risk Centralization Office of the Central Bank and from the State Investment Bank. Public sector consists of the General and Annexed Budgets, State Economic Enterprises and Local Administration. The State investment Bank which leands exclusively to State Economic Enterprises. The private financial sector consists almost exclusively of the Bank Liquidation Fund. Source: State Planning Organization, Turkey. Tabl, l. L EFTODL £M OY VI~L&L ImTnirim. 196 to 1[1 (outw-an=l at an->c .) 1962 1963 1964 1965 1966 1967 1968 1969 19m0 1971 (TL. million) Central Bank 95m 1159, 12661 16672 16810 19337 2257005 - 3 c~retl- B~km 23162 25298 24001 . uss 6725 8 59124 72fis 77560 F -Publie 15736 16878 18691 22918 28263 3559 2969 6178 35 -Printe 7426 8120 9310 U578 162 26396 2 De~lopaent Bank. 8699 87v6 7127 9280 12316 9603 11069 12706 1628 1~9 :-Public 8133 8105 6398 8398 11226 81M 9631 10813 1318 13361 -Priate 566 601 7 729 882 lo 1.16 1638 1893 "»30 In~rance C-.-nie. 533 683 666 750 861 996 1129 131 1686 TOL4 121401 37350 763 7 o "26 11 __ (rar Cent) Central Bank 22.7 23.6 24.5 22.2 20.8 22.1 21.16 21.8 25.9 26.1 Cercial 55.3 55.7 59.2 60.6 60.6 6.1 65.3 65.7 60.7 61.7 -Public 37,6 37.2 39.5 60.1 60.1 %2.5 642.6 61.7 37.7 - 36.8 -Printe 17.7 18.5 19.7 20.3 20.5 21.6 22.7 26.0 23.0 2.9 Develpment Banks 20.8 15.0 16.2 12.2 .2 8 11.1 --Public wi 171.3 &0 1T U107 I i" -Private 1.6 1.3 1.5 1.5 1.5 1.9 1.8 1.7 2.1 2,1 Inurance cdpanie8 1.3 1.5 1.3 1.2 1.1 1.1 1.1 1.0 1.0 1.1 TOrAL 100.0 100.0 100.0 100.0 100.0 100.0 10.O Bourc: Banks Association of Turk.y Hinistry ot Coere, Insurance Control Board Table 17: THE COST OF BANK CEDIT (Legal ceilings on interest and commissions) Before After 28 79"T71973 28 75 1973 Rate of Interest Rate Rate of Interest Rate Tax ahr Meum Tax 'a-nd Mt . n .E= Cmisaoe = re m-L2 o-m iIss ons TRF2 Amount of Credit 100.000 100.000 100.000 100.000 Interest 12.114 12.550 10.812 12.550 Transaction Tax 25% 3.028 3.137 25% 2.703 3.137 Commaission on Advances on Bills 2% 2.500 2.500 2% 2.500 2.500 Transaction Tax 25% 625 625 25% 625 625 Stamp Tax 5% 100 100 5% 100 100 Camuunication, etc. 2.5% 250 250 2.5% 250 250 Transaction Tax 25% 62 62 25% 62 62 Expertise Fee 5% 100 100 4% 80 so Transaction Tax 25% 25 25 25% 20 20 Investigation and Control - Fee 6% 600 6oo 3% 300 300 Transaction Tax 25% 10 150 25% 75 75' Mortgage Cost 7% 182 182 7% 182 182 Total 19.736 20.231 17.709 19.881 Cost of Credit 19.73% 20.23% 17.71% 19.88% Tax Component in Cost of Credit 3.99% 4.09% 3.58% 4.01% L To obtain a credit of Ti 100,000 the borrower has to present documents to the value of TL 125,000 for credit against bills and TL 130,000 for credit against mortgage. /' The interest rate ceiling on general short-term credits was reduced from 11.0% to 10.5% in February, 1973. The interest rate ceiling on medium term credit is 12%. Source: Mr. Ongor Utras, ?What is the effect of new decisions on interest and credit,11 Turkish Economic Gazette, 22 February 1973. Tablt IB: 3E99~ or MT1M DWFU£~t "m TL al-lice; eutetaeng s et d of Decembe) Pail-up Ecservge Ietained Total Bonds Reere Deposite Free Treasury 3nternal Other 8brt Total ~sn. r Year C=ptrl and Provisione U.rnings Itarnal ou.tstaxndins Iequreet salbet bole Deposite loajne Vinance Fulde term Creite DasslrcesToa Aeourcee 1o bl leased Tekse ever 1964 432.7 - 71.9 2k.6 1,026.1 1,233.8 33.9 151.3 - . 155.1 _,60w.2 3.106.8 1965 682.0 16.7 63.6 562.1 1,769.5 1,251.6 15.1 161.o - 176.6 3,37 6 3.93.7 1966 525.1 45.1 77.3 66, 2,463.8 1,268.7 76.5 2.7 - . 202.2. 6.3.683 1967 895.6 79.5 118.6 1.91.1 2,657.2 1,286.7 2.0 15.1 621.7 1,26.3 . 272.9 Lon. 1968 969.6 131.2 84.1 1.184.9 6,620.3 1,29.6 16.0 0.1 656.7 1,170.7 655.16 . 9.33. 1969 1,000.0 184.9 59.7 1.24,6 5,738.6 1,291.5 235.0 - 706.5 1,031.5 %6.9 .567. 10m1. 1970 1,000.0 244.6 -208.8 1.o"LQ 7,001.6 1,293.9 15.1 - 1,963.5 1,263.6 40.9 li,Wr., 1971 1,000.0 266.8 35-7 1,302.5 7,657.8 1,295.6 - 1,660.8 1,190.6 673.3 32.058,1 13,360,6 1972 1.023.3 302.5 72.1 1.615.0 8,207.5 1,296.6 46.0 - 682.6 669.2 1,6591.0 233607.5 ource: State Investwent Ben* A.nul Reporte Table 19: FLOWS OF FUNDS TIHROUGH FINANCIAL INSTITUTIONS, 1963 - 1968 (TL million; increases in amounts outstanding at end Dec.) USE Source Inturmediary Sectors Fund Creating and Using Sectors AL A2 A3 A4 B1 B2 B3 B4 B5 B6 Total Central Bank Al --- 3321 0 3040 697 --- --- 59 151 8631 Banka A2 4194 ---. -14 1601 717 9837 5314 -- 14638 36287 Social Insurance and Government Pension Fund A3 58 -- 77 354 186 453 470 -- 1276 7278 State Investment Bank A4 25 1329 -58 --- -164 2866 --- --- 151 W149 Public Financial BI 176 2424 --- 1558 4158 SEE's B2 116 578 --- 59 753 Private Fims B3 702 2912 138 --- 3752 Households B4 245 11616 6829 --- 20890 Foreign Sector B5 -505 43 --- -1o5 -1867 Other B6 1477 13606 369 -126 15326 TOTAL 8634 36287 7278 4149 4831 4466 10290 5784 59 17579 99357 Source: Ozar Ertuna: Turkiye de Fon Akimlari Uzerine Bir Inceleme TSKB, Istanbul, 1970 Table 20: COMPONENTS OF COST OF CORPORATE BCND BORROWING .The effective cost of borrowing by the issue of corporate bonds is estimated to be 20 percent per annum on the following assumptions: 1. Amortizationt A seven-year bond with two-year grace; repayment in five equal annual installments. 2. Interest: l A nominal interest payment of 15 percent of the outstanding volume of bonds. 3. Guarantee Commission: /2. 1 percent of the outstanding volume of principal and interest payment due in that year. 4. Servicing Commission: L. 1 percent of the amortization and interest payments due to be paid to bondholders each year. 5. Banking and Insurance 25 percent of commissions for guarantee, Transactions Tax: servicing and underwriting. 6. Other Expenses: L2 0.12 percent of initial issue. 7. Initial Issuing Expenses: L. (as percent of initial issue) (a) Underwriting fees: 3 percent (If the issue is underwritten on a best effort instead of firm basis, this would be 1 percent.) (b) Advertising: 1 percent (c) Stame duties: 0.9 percent (d) Listing: 0.05 percent (e) Printing: 0.07 percent (f) Mortgage: 2.6 percent (A mortgage is required to cover 1.4 times the initial issue; the cost of obtaining a mortgage is assumed to be 0.7 percent.) 8. The effective cost is calculated as the internal rate of return on the net flows over the eight periods. Ll This is the legal ceiling on the interest rate. /2 Commissions and fees are subject to agreement between the issuer and guarantor. The stated rates are approximately those currently charged by TSKB. Source: TSKB.